British American Tobacco drops and sues PwC over pollution scandal

BAT is fighting a legal battle to avoid being dragged into the Fox River scandal in Wisconsin

British American Tobacco has dumped its auditors PwC and taken them to court over a potential $1bn (£651m) US environmental damages bill.

It is the latest in a long line of tests for the Big Four auditing firm, which is still reeling from accusations by the Public Accounts Committee that it promoted tax avoidance “on an industrial scale”.

PwC’s accountants are also under investigation by the Financial Reporting Council over its auditing of one of its biggest clients – Tesco – after a whistleblower at the supermarket revealed profits had been over-inflated for at least three years.

BAT is fighting a legal battle to avoid being dragged into the Fox River scandal in Wisconsin, US, where toxic chemicals used in carbonless copy paper (used on contracts where writing is transferred to several copies of the same document) was pumped into the waters.

Legal documents have already said the clean-up costs are estimated at $827m, with a potential natural resources damage bill of a further $382m. The courts have said NCR, a New York-listed electronics firm, which previously owned paper mills along the river, was responsible. However, BAT bought an NCR subsidiary – Appleton Papers Division – in 1978 and could be liable for some of the bill.

According to documents, a legal indemnity signed by BAT prior to the purchase appears to be invalid and the company has put £267m to one side to cover the costs. PwC was auditor to Windward Prospects, part of Appleton, at the time BAT bought it in 1978 and is being sued, along with Windward, over the legal indemnity. BAT said: “This situation has arisen as a result of proposed litigation by a group subsidiary against PwC. The potential claims against PwC arose from work carried out by PwC in relation to the audit of the accounts of a third party. These claims do not concern the audit of any BAT Group company.”

The tobacco giant added that PwC rivals Deloitte, Ernst & Young and KPMG were being invited to tender for the auditing contract.

The complex details of the legal case are highlighted in BAT’s annual report. But it appears PwC’s involvement in the original purchase of Windward Prospects was only recently discovered.

Fox River has been lined with paper mills for several decades and still has more than 20 operating along its banks.

However, since the 1950s there had been concerns around contamination to the water from the recycling process that saw chemicals used in certain paper ending up in the river. By 2010, the US government filed a lawsuit against nine paper companies over failures to clean up the chemicals and, in 2013, NCR was deemed wholly responsible for the clean-up of the mid and lower portions of the river. This decision is being appealed.

BAT owned the subsidiary in a period when it had a wide-ranging portfolio of businesses, including a heavy investment in the insurance industry, before turning its attentions exclusively to tobacco ahead of its floatation in 1998.

PwC declined to comment.