AWG, the former Anglian Water, was given permission to interview the auditors of Morrison Construction before it completed its fateful acquisition of the building company in October 2000, yet failed to uncover a massive row about Morrison's figures.
The water group last week sued Sir Fraser Morrison, Morrison's former chairman, and Stephen McBrierty, the operations director, for £130m which it claims it has lost as a result of the troubled acquisition. AWG alleges that the duo misrepresented Morrison's financial position and hid losses to secure the £263m deal, an allegation both deny.
AWG's statement of claim, obtained by The Independent on Sunday, contains a section relating to problems with the auditing of the accounts for the year to 31 March 2000.
AWG alleges that Kevin Rennie, the partner at accountants PricewaterhouseCoopers in charge of the Morrison audit, raised a series of questions about how the construction group had reached its profits figures.
Mr Rennie went not only to Sir Fraser with his concerns, but also to the group's audit committee, and he criticised the company's financial controls. Mr Rennie considered that up to £5.7m of the £26.8m of taxable profits declared by Morrison were either doubtful or should not have been recorded in the first place.
In the end Morrison agreed to make £3.9m of adjustments to its figures, but hid them, it is claimed, in either general provisions or balance sheet adjustments. During the negotiations about AWG's purchase of Morrison, which lasted from June to October 2000, Sir Fraser gave the AWG team permission to interview Mr Rennie about his work on the Morrison audit.
Sir Fraser signed what is known as a "hold harmless letter" stating that auditors were allowed to give information to a third party without fear of being sued for betraying confidence. This would have allowed Mr Rennie to inform AWG not only about the row surrounding the 1999/2000 accounts but also about a previous row that had led PwC to write to the Morrison audit committee in November 1999.
In its letter, PwC said: "We raise again with the Committee our concerns regarding revenue and profit recognition ... The impression we gain again is that Morrison is under pressure to meet its profit targets and this causes concern regarding the approach taken by management in delivering forecast profits."
The issue of forecast profits are central to AWG's claim against Sir Fraser and Mr McBrierty. It claims Morrison said it would make a profit of £30.5m for the year to March 2001, yet in the end it declared a loss of £46.5m.
However, it appears that the problems with the previous year's figures were not revealed when executives from AWG interviewed Mr Rennie.
A spokesman for AWG said he was not able to explain why the problems with the 1999/2000 accounts were not uncovered in these discussions or during other discussions with members of the Morrison management team.
Chris Mellor, chief executive of AWG, has to override objections from some of his institutional shareholders before buying Morrison.
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