Manchester mutual sues auditor Grant Thornton for £49m after hedge led to loss

The mutual said the claim was “for breach of contract, negligence and breach of statutory duty relating to audit services and advice”

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The Independent Online

Grant Thornton suffered a fresh blow yesterday when Manchester Building Society filed a £49m negligence claim against its former auditors.

The mutual said the claim was “for breach of contract, negligence and breach of statutory duty relating to audit services and advice” between 2006 and 2013. Specifically, it relates to alleged “hedge accounting” problems involving interest-rate swaps that the society claims led to its widely reported financial difficulties in 2013.

In April that year, after the problems with interest-rate hedging came to light, it was forced to raise £18m in new capital from rival lenders, including the Nationwide.

Later in 2013, it had to restate its 2012 accounts, turning an earlier reported £0.6m profit into a loss of £21.9m.

Since then, the society has worked to improve its financial position and earlier this month reported a return to pre-tax profit during 2014 of £4.3m, following 2013’s £1.6m loss.

The Manchester is Britain’s 19th biggest building society, with £650m in assets, around 19,000 savings account holders and 3,330 borrowers.

It wasn’t the only building society to be hit with financial problems in the last few years. The West Bromwich was bailed out by its lenders in 2009 after an interest-rate hedging deal went wrong.

The Cheshire, Derbyshire and Dunfermline building societies have been rescued by the Nationwide, and financial problems of different stripes have seen the Barnsley, Chelsea and Norwich & Peterborough taken over by the Yorkshire.

The negligence claim would go to court if a satisfactory agreement can’t be reached with Grant Thornton, the Manchester said. The auditors refused to comment, saying in a statement: “As a large professional services firm, there are inevitably occasions when we become involved in legal claims.”

Grant Thornton is a limited liability partnership with 26 offices. The firm’s latest turnover was £512m, of which £135m related to audit.

The Manchester’s claim covers an accounting problem that the watchdog, the Financial Reporting Council (FRC), has been investigating since August 2013. However, last month, Grant Thornton’s audit work was heavily criticised by the FRC in its latest Audit Quality Inspection report, which included evidence of “serious failings”.

The FRC’s damning report said: “Three [of eight investigated] audits required significant improvements in relation to one or more of the following areas: insufficient involvement in supervision, direction and control of group audits; lack of management challenge or professional scepticism in a number of areas of judgment or estimate; and insufficient evidence of appropriate reporting to audit committees.”

Responding to the report in a letter, Grant Thornton’s head of audit Mark Cardiff said: “We have already implemented new or enhanced policies and procedures designed to address other recurring issues identified in the report and the impact of these developments is beginning to be evidenced in the findings of internal quality reviews.”

The accountant firm, which resigned as the Manchester Building Society’s auditor in 2013, now has two weeks to acknowledge the negligence claim. Then will begin what is likely to be a lengthy legal process as it fights the new accusations.