Failed subprime lender Cattles is suing PwC, alleging that negligence over the audit of two years of financial statements led to the company incurring liabilities of £1.6bn.
The claim was filed in the High Court yesterday, and is one of the largest ever brought against a professional services firm in the UK.
It is being brought on behalf of the creditors by insolvency firm Zolfo Cooper, who were appointed supervisors to the scheme of arrangement at Cattles after the company was hit by accounting irregularities. Cattles specialised in providing unsecured loans to borrowers with poor credit histories.
The claim states that PwC should not have signed off the 2006 and 2007 financial statements of the group, which once had a £1bn market capitalisation.
It says these statements 'fundamentally mis-stated the financial position of the group. In particular, if the impairment provisions had been properly audited, it would have revealed that the group's business, over 90% of which comprised a loan book, was not financially viable.'
Zolfo Cooper said that after the audits by PwC the group 'continued to trade for two more full years [after 2007], lending money and incurring liabilities and expenses in excess of £1.6bn throughout that time'.
In 2009, Cattles admitted it had underestimated the provisions it needed to make for bad loans. It had reported profits of £165.2m in 2007, when a proper impairment of the bad loans would have resulted in a £96.5m loss. It restated its 2007 accounts, while its 2008 accounts showed a £745m loss when the provisions were added.
A spokesperson for the scheme supervisor said: 'After a thorough, independent and objective review of the merits of this claim, it is clear to us that PwC were negligent in their role as auditors. As a consequence, Cattles and its creditors suffered very significant losses. It is therefore in the best interests of the creditors of Cattles that this claim is properly pursued to enable creditors to be appropriately and fairly compensated.
PwC has stated it intends to' vigorously defend' its work against what it describes as the 'inflated and misguided claim'.
In a statement, PwC said: 'We are disappointed that this claim has been issued given the FSA's censure of the company for market abuse as well as the FSA's conclusion that certain directors of Cattles were found to have acted without integrity in discharging their responsibilities.'
In March last year, the Financial Services Authority (FSA) fined James Corr, Cattles' former finance director, and Peter Miller, a former finance director of a subsidiary, £200,000 for misleading investors about the lender's loan book.The events at Cattles are subject to an ongoing investigation by the Accountancy and Actuarial Discipline Board.
