Big Four firm Ernst & Young may need some life insurance of its own as it argues in the courtrooms of England that it is not responsible for the near collapse in 2000 of 240-year-old Equitable Life, Britain's oldest life insurer.
Equitable ran into trouble last year over guaranteed annuity policies, which promised holders a definite return. A court ordered the company to honor policies sold in the 1970s and 1980s when interest rates were high. The potential liabilities were so high that the life assurer had to slash bonuses and turn away new business.
E&Y is accused of performing its audits for 1997-1999 with negligence. In court Tuesday, the accounting firm admitted it had failed to account for potential losses in its audit of Equitable Life but did not take responsibility for the company's near-collapse. "There was a failure to insist that a provision for possible losses due to the guaranteed annuities be included in accounts," said Mark Hapgood, Ernst & Young's barrister. "But we do not accept the case that insisting on a provision would have caused the directors of Equitable to act differently."
E&Y contends that it included the possibility of losses stemming from the annuities in reports to regulators and that Equitable's directors were aware of the risk.
E&Y resigned as Equitable's auditor in March, 2001. The accounting firm faces a life-threatening $4.5 billion in damages should it be found guilty of negligence.