Ernst & Young fined £500,000 over Equitable Life Policyholders' group condemns 'slap on the wrist'

Guardian, Ruth Sunderland 4 June ‘10

The former auditors of Equitable Life have been fined and reprimanded for their role in the insurer's near collapse, a decade after the event.

Ernst & Young has been fined £500,000 plus £2.4m costs and both the firm and former partner Kevin McNamara have been reprimanded by the joint disciplinary tribunal (JDT), which polices the accountancy profession.

Another two individuals, Gregor Stewart, a former E&Y partner now at Lloyds Banking Group, and John Bannon, an actuary who worked with E&Y and is now a group director at insurer Liverpool Victoria, are being investigated by the Accountancy and Actuarial Discipline Board.

It comes after E&Y appealed against a much more severe judgment issued two years ago. In December 2008 it obtained an injunction which prevented a report produced by the JDT from being disclosed to anyone, including other regulators. That injunction prevented evidence about Bannon and Stewart from being passed to their professional bodies for investigation, until it was lifted six months later.

In 2008, the JDT ruled that E&Y and McNamara had been guilty of more than 20 instances of a "lack of professional competence" when auditing Equitable's accounts for 1997, 1998 and 1999.

It also found that they had been guilty of "a lack of objectivity and independence" which it said had been "the most serious" of the allegations – a finding which was reversed on appeal. E&Y was at that stage fined £4.2m with £5.75m costs.

Paul Weir, spokesman for the Equitable Members Action Group, said: "This looks like little more than a slap on the wrist for E&Y who should have been blowing the whistle to protect policyholders rather than colluding in a cover-up of the truth about the society's lack of reserves. The puny size of the fine is dwarfed by the costs of the tribunal."

E&Y said it welcomed the appeal judgment though it expressed frustration that the JDT did not agree its judgments were reasonable in the remaining findings against it. The firm added: "Any lessons from our audit of Equitable have long been learned and embedded in our audit systems and procedures. The relevant individuals at E&Y have retired from the firm in the past 10 years ... We regard these matters – a decade on – as now closed."

Equitable Life was almost ruined in 2000 when it closed to new business after failing to set aside enough capital to cover guaranteed payouts on some of its pension plans. The JDT found that E&Y should have warned policyholders in 1998 and 1999 about the risks of the insurer losing a court case on whether it was obliged to honour the guarantees. It also found that the auditors ought to have warned that the 1999 accounts did not give a true and fair view of Equitable's finances because they did not highlight the shortfall in reserves.

Equitable launched a lawsuit against E&Y five years ago but subsequently abandoned its claims. The insurer said: "We have noted this report. The board of Equitable Life is focused on recreating value for our policyholders in the future. We are working with the new government to establish a compensation scheme that is swift, simple, transparent and fair."

Separately, E&Y could face legal action after a damning report into the collapse of Lehman Brothers accused it of professional negligence over a number of years before the downfall of the 158-year-old American bank in 2008.

Equitable Life report unlikely to satisfy policyholders

Financial Times, by Oliver Ralph 4 June ‘10

Undue haste is not normally an accusation levelled at accountants and in the case of Equitable Life, where investigations seem to take twice as long as they do elsewhere, a lengthy wait should come as no surprise.

So, 10 years after the events that led to the near demise of the life assurer, we finally have a report into the conduct of its auditors, Ernst & Young. And for good measure, we also have the results of E&Y’s appeal against some of the report’s conclusions as well as fines which have been levied against it.

The overall result is underwhelming for policyholders. The original investigation by the accountants’ Joint Disciplinary Tribunal fined E&Y £4.2m and made it pay £5.75m in costs. After appeal, the fine has been cut to £500,000 and the costs have fallen to £2.4m.

That’s because the appeal tribunal found that E&Y acted with objectivity and independence towards Equitable Life, contrary to the original findings.

E&Y didn’t contest some of the JDT’s other findings – that it should not have signed off the 1999 accounts and that it should have warned policyholders that Equitable Life faced a crisis if it lost a crucial court case (which, eventually, it did).

So the appeal tribunal’s view is clear – £3.7m of the original fine related to the idea that E&Y had not been objective and independent. The remaining £500,000 related to other, uncontested, misdemeanours such as the signing of the 1999 accounts and the failure to warn policyholders about the court case.

From E&Y’s point of view, this looks perfectly reasonable – for an accountant to be found guilty of a lack of independence and objectivity is a very serious matter.

The policyholders might view things differently though. If there had been more warning of the underlying problems at Equitable Life, they might have been able to take action before it collapsed. They didn’t and, as a result, many are heavily out of pocket. Far more out of pocket than E&Y (with revenues of $21bn in its last financial year) will feel after paying its £500,000 fine.

Big four dominance

While PwC, KPMG and Deloitte might be enjoying watching E&Y squirm over its Equitable Life fine, other aspects of the case should shake them out of their schadenfreude.

In a separate statement, the body overseeing the tribunal raised concerns about the structure of the profession, saying that the dominance of the big four accountancy firms prevented it from finding independent expert advice to assist its investigation. PwC, KPMG and Deloitte were all working for either Equitable Life or E&Y.

The tribunal isn’t the first body to raise concerns about the dominance of the big four in recent weeks.

Stephen Haddrill, chief executive of the Financial Reporting Council, is worried that proposals the FRC made three years ago are doing little to improve competition. The new government is also looking at the situation.

The accountants, of course, insist that there’s nothing wrong. John Griffiths Jones, head of KPMG in the UK, recently told the Financial Times that "there are plenty of industries where there are four big players” and that “the world just has to get on with it".

But accountancy is not the same as other professions. It is a vital link between investors and the companies they own and as the world recovers from the financial crisis their role is a vital one.

In that context, investors – as well as other bodies – need plenty of choice to prevent the sorts of conflicts of interest that hampered the JDT’s investigation. It is time the big four become a slightly smaller five, six or seven.

Ernst & Young fined £500,000 over Equitable Life collapse

Daily Telegraph, Jamie Dunkley 4 June ‘10

Ernst & Young has been hit with a £500,000 fine and ordered to pay £2.4m in costs for its role in the near-collapse of troubled life assurer Equitable Life in 2000.

The company and its former client services partner, Kevin McNamara, were reprimanded by the accountancy profession's Appeal Tribunal for audit reports of Equitable carried out between 1997 and 1999.

In 2008, the Accountant's Joint Disciplinary Scheme ruled that Ernst & Young and Mr McNamara were guilty of more than 20 instances of a "lack of professional competence" when auditing Equitable. It also found that they had been guilty of "a lack of objectivity and independence", which it found to be "the most serious" of the allegations.

However, the ruling over objectivity and independence was overturned at appeal. This led to the tribunal on Friday reducing the original fine of £4.2m and £5.75m costs imposed.

Ernst & Young said it welcomed the latest ruling, which also threw out complaints relating to eight of the 11 years accountancy firm audited Equitable.

In a statement, Ernst & Young said: "Any lessons from our audit of Equitable have long been learned and embedded in our audit systems and procedures. We extend our sympathies to the policyholders of Equitable Life, who have been impacted by the near-collapse of the society, following events which lay well outside of our control and the remit of our role as auditor."

Speaking on Friday, Equitable said it had noted the latest ruling but was focused on working with the coalition Government to win compensation for victims of its troubles, who lost billions in savings.

A spokesman for the Equitable Members Action Group, which represents 21,000 policyholders, said: "This looks like little more than a slap on the wrist for Ernst & Young, which should have been blowing the whistle to protect policyholders. The puny size of the fine is dwarfed by the costs of the tribunal."

The money from the penalty imposed on Ernst & Young will go towards funding the running costs of the Accountant's Joint Disciplinary Scheme.

How insurers, auditors and regulators failed to protect savers

Daily Telegraph, Ian Cowie 7 June ‘10

Nearly a decade after Equitable Life collapsed and after more than 200,000 of its policyholders have died waiting for justice, the regulators have given its auditors "a slap on the wrist".

That’s how the Equitable Members Action Group (EMAG) described the ruling that auditors Ernst & Young must pay a fine of £500,000 and £2.4m costs.

You might think this near-£3m hit amounts to a bit more than slap on the wrist. But bear in mind that the Accountants’ Joint Disciplinary Committee (JDC) originally imposed fines more than four times bigger than this – plus twice as much in costs. So Ernst & Young may well be relieved that it succeeded in reducing these figures on appeal.

The damage done to more than hundreds of thousands of  people’s pension savings remains unchanged. The JDC reckons that more than £4.7bn was invested in Equitable during the final two years before it was forced to close its doors to new business. It is hard to believe many savers would have chosen Equitable if they had been given a fair and accurate statement of just how precarious the insurer’s finances were by then.

The final two years were particularly significant because they followed the first court ruling against Equitable’s plainly inequitable attempts to discriminate against policyholders who insisted it should honour guarantees it had sold them.

I remember arguing with the insurers’ directors at that time when they claimed that the word ‘guaranteed’  – as in ‘guaranteed annuity rate’ – meant something different from what it said in the dictionary. Ernst & Young, who signed off Equitable’s accounts since the 19th century, should have done the same.

As it turned out, the life company did not have adequate insurance against the risk that the House of Lords would arrive at the natural justice conclusion that Equitable had to honour the guarantees it sold. The over-promised fund was forced to close to new business and policyholders’ returns plummeted.

That was bad for everybody – not just Equitable policyholders – because the destruction of this institution damaged trust. And, while you can opt out of saving or insuring, you cannot opt out of growing old or suffering misfortune. So it is important for everyone that EMAG is making progress with its campaign to persuade MPs to bring this sad saga to a just ending.

Now they are pinning their hopes on the coalition government promise: "We will implement the Parliamentary and Health Ombudsman’s recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of  regulatory  failure."

Let’s hope these savers are not disappointed again. The insurance industry, its auditors and the regulatory  authorities are keen to emphasise that Equitable’s failure was a long time ago and they rather wish we would get bored with the story. They are wrong to do so because until the victims are properly compensated this scandal stands as a warning to savers not to trust the insurance industry, its auditors or the regulators.