WorldSpreads sues Ernst & Young, claiming negligent auditing services

Failed spreadbetting business Worldspreads has sued accountancy firm Ernst and Young (E&Y) over allegedly negligent auditing services.

WorldSpreads Ltd (WSL) claims it could not continue to trade after a shortfall, which may exceed £22 million (€26 million) was allowed to grow over a number of years in its client account balances.

The shortfall meant it was unable to comply with UK Financial Service Authority (FSA) regulations and that led to its board putting the company into special administration in March last year, it said.

E&Y was negligent in carrying out its services and obligations to WSL in connection with audits between 2007 and 2011, it is claimed.

The case was transferred yesterday to the Commercial Court by Mr Justice Peter Kelly on consent between the parties.

WSL is registered in the UK and is a wholly-owned subsidiary of WorldSpreads Plc, registered in Ireland. It was an online financial markets trading business. Its principal activity was the provision of spread betting services, including on foreign exchange, futures and options.

Ernst & Young, Harcourt Centre in Dublin, acted as its auditors since 2007 and was engaged to carry out audits under the FSA’s supervision rules, it is claimed.

In 2008 and 2009, as a result of reports into WSL’s activities by the FSA, a number of issues of concern about the transaction reporting of WSL were raised.

WSL says Ernst & Young issued unmodified opinions on its financial statement audits from March 2007 which, while providing a list of breaches of the regulations, also stated WSL maintained systems to comply with the relevant FSA “client asset sourcebook” rules.

In March 2012, as a result of certain disclosures by WSL’s finance controller, the company learned there was a substantial shortfall in the amount of client money which ought to have been held in a segregated account and the amount actually held, it is claimed. WSL says the shortfall to clients may exceed £22 million.

WSL says Ernst & Young failed to consider the concerns of the FSA and failed to identify that financial statements and/or reports received from WSL had been manipulated. It also claims the accountancy firm failed to give an appropriate opinion on the financial statements and failed to ensure appropriate accounting policies were adopted by WSL.

It is also claimed Ernst & Young failed to recognise that circumstances existed that caused financial statements to be materially mis-stated and failed to report promptly to the FSA in light of the “multiplicity of breaches” identified in 2007.