Equitable’s case against Ernst & Young is set to reach the courts.
Equitable Life is set to press ahead with legal action against auditors Ernst & Young. The dispute is all part of Equitable’s crisis in guaranteed annuities, for which it insisted up to 2000 that it had exposure of only GBP50 million. When the true scale of liability proved to be closer to the GBP1.5 billion mark, Equitable, the world’s oldest life assurer, was brought to its knees.
Now the new board of Equitable is looking for those responsible: it blames Ernst & Young for not having realized that the life assurer had a particularly high-risk exposure, and for being negligent in signing off certain accounts. Equitable is also taking legal action against 15 of its former directors on behalf of policyholders.
Equitable is keen to salvage some honor in not being entirely responsible for its own demise. But in these post Enron days, accountancy firms are also painfully aware of the need for a good public reputation.
The clash has huge potential to damage Ernst & Young, should Equitable win. The accountant could face financial ruin if negligence were proved. One high court judge recently stated that if Ernst & Young lost comprehensively, it would lead to the destruction of the firm and possibly even to the bankruptcy of many of its partners.
However, Ernst & Young believes that its legal position is strong. On Monday, January 13, it will be asking the UK High Court for the claims to be struck out, arguing that they have little chance of success. Even if Monday’s application fails, Ernst & Young has said it is determined not to settle out of court. The millions of pounds of legal costs for a full trial will be worth it, if Ernst & Young is capable of protecting its reputation.
Related research: Datamonitor, UK Life Assurance 2002 (DMFS1432)
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