The former Anglo Irish Bank is suing its former auditors Ernst & Young for more than €50m damages over losses allegedly resulting from the firm’s “repeated failure” to un-cover alleged “highly unusual and improper” “bed and breakfast” loan transactions by former Anglo chairman Seán FitzPatrick.
It is claimed the auditors were in breach of contract in failing to uncover an alleged practice where, for brief periods around the end of Anglo’s financial year, Mr FitzPatrick repaid his large Anglo loans with monies borrowed from Irish Nationwide Building Society, but reversed those transactions days later.
The net result was that large loans otherwise due from Mr FitzPatrick were moved from Anglo’s balance sheet, creating the impression he owed less than he did, the bank claims. The alleged transactions were called “bed and breakfast” transactions because INBS provided temporary accommodation for the loans until they returned to their “true” home in Anglo.
It is claimed Ernst & Young had access to documents evidencing the FitzPatrick loans, including a certificate of income and salary and a letter relating to his loans.
Had Ernst & Young made particular inquiries about a letter provided to them by Mr FitzPatrick on Nov 29, 2006, and a schedule attached to that, the B&B arrangements would have been disclosed, the bank claims. The audit work by Ernst & Young on directors loan transactions fell below the relevant auditing standards, it is alleged.
The practice came to light in 2008 when, due to market turmoil, Mr FitzPatrick could not refinance his loans with INBS “as had become usual”, the bank claims. He resigned as Anglo chairman in Dec 2008.
It is alleged the failure to uncover the B&B practice significantly increased Anglo’s exposure to Mr FitzPatrick after the end of the 2006 financial year. Before the 2006 B&B transactions, Anglo had loaned €69m to Mr FitzPatrick and, after the 2006 annual financial statements were signed on Dec 5, 2006, it loaned him another €58m.
The bank expects to suffer losses of “well over €50m” on the loans, it said.
Solicitors for Ernst & Young wrote to the bank’s solicitors in Jan 2011 saying the firm was not aware certain Anglo directors had adopted “the unprecedented refinancing practice with a view to avoiding disclosure requirements”, that was never disclosed to Ernst & Young and it had “no reason to suspect such activity” based on their previous audit experience.
The action by Irish Bank Resolution Corporation, formerly Anglo, was transferred to the Commercial Court yesterday on consent of both sides by Mr Justice Peter Kelly, who made directions for exchange of legal documents and returned it to May.
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