E&Y heads off £350m Freightliner claim

An Appeals Court judge has upheld a High Court ruling that Ernst & Young
was not liable for audit work done at British truck maker ERF.

ERF was sold to MAN in 2000 for nearly £100m, but had been owned by Canada’s
Western Star, which in turn merged into Freightliner.

MAN succesfully sued Freightliner for £350m over the hidden losses at ERF,
with Freightliner attempting to recoup its liability for them from former
auditors E&Y.

But earlier today Lord Justice Chadwick upheld the 2005 high court decision
that found Freightliner liable for frauds carried out at ERF.

In handing down his decision, Chadwick said: ‘To hold that the auditors
assumed responsibility for the use which a dishonest employee of the audited
company might make of the accounts in the context of the parent company’s
negotiations for the sale of the company would, I think, be to impose a
liability greater than they could reasonably thought they were undertaking… it
is impossible to hold that E&Y (rather than Western Star) assumed
responsibility for the use by Mr Ellis, on behalf of Western Star of the
information which E&Y had provided to Western Star.’

Freightliner is understood to have settled its case with Man, paying £250m.

E&Y said they were not surprised by the Court of Appeal’s decision.

Lisa Cameron, general counsel of Ernst & Young said: ‘We have stressed
consistently since the beginning of this action that the case brought by
Freightliner against Ernst & Young was unsustainable because it attempted to
extend the recognised boundaries of an auditor’s duties and responsibilities.’

By the time the fraud – by the former financial controller Stephen Ellis –
was discovered in mid-2001, there was a £100m hole in ERF’s balance sheet.

At the original trial in 2005, Ellis made stark admissions in the original
trial that he had concealed trading losses and deliberately misled E&Y and
made several false journal entries that gave rise to an £18m discrepancy. He
also admitted he had concealed and continued to defraud the company for more
than a year after it had been sold, by which time E&Y was not longer the
auditor.

Freightliner had vigorously fought the claim, arguing that Western Star was
as much hoodwinked by the frauds at ERF as MAN.

Further reading:

E&Y facing legal challenge from
truckmaker

Truck group wins claim on bad sale