Equitable Life inquiry could hit Ernst & Young with huge fine

Ernst & Young could be landed with a multimillion pound fine from the accounting industry's watchdog, which is to hold a tribunal into the firm's controversial auditing record of the stricken insurer Equitable Life.

Ernst & Young could be landed with a multimillion pound fine from the accounting industry's watchdog, which is to hold a tribunal into the firm's controversial auditing record of the stricken insurer Equitable Life.

The development is a further blow for E&Y, which is already being pursued in a separate civil lawsuit by Equitable itself for compensation of £2bn on the basis that the "big four" accounting firm failed to spot fundamental flaws in its business model. If Equitable wins the case, it would wipe out E&Y in the same dramatic way that Andersen collapsed after its involvement in fraudulent off-balance sheet financing at the energy company Enron.

E&Y is now also likely to be the subject of a formal hearing by the Joint Disciplinary Scheme, the accountancy regulator, of alleged serious failings in its role as auditor of Equitable. The JDS is understood to be planning to charge E&Y with "general audit failure". The charge is contained in a "draft particulars of claim" which was sent to E&Y in the past two weeks. The claim names E&Y and two of its senior partners, including Paul McNamara, the lead audit partner on the Equitable Life account.

Equitable has until Friday to respond to the claim. The allegations will then be heard at a JDS tribunal, which is expected to start at the end of the month. An E&Y spokesperson said: "We believe the allegations are misguided and we will vigorously defend them."

The JDS has the power to impose unlimited fines on firms. It can also issue severe reprimands and can withdraw a firm's registration as an auditor. Individuals can be fined and excluded from the accountancy profession.

Equitable was forced to close to new business in December 2000 after it lost a crucial House of Lords case over its policy of cutting payouts to customers with annuities which guaranteed a fixed annual return.

The judgment landed Equitable with a crippling bill of £1.5bn, which drove it to the brink of insolvency.

The JDS's investigation of E&Y, which audited Equitable's accounts between 1990 and 2001, will focus on the technical aspects of its work.

Equitable's own case has two broad strands: one focuses on E&Y's failure to warn the mutual that it could not cut payouts to guaranteed annuity rate policyholders. The other centres on the fact that E&Y did not seek a buyer for Equitable before it was taken to the brink of collapse by the Lords ruling.