The former Anglo Irish Bank is suing its former auditors Ernst Young for more than €50 million damages over losses allegedly resulting from the firm’s “repeated failure” to uncover alleged “highly unusual and improper” loan transactions, known as “bed and breakfast” transactions, of former Anglo chairman Seán FitzPatrick.
It is claimed the auditors were in breach of contract in failing to uncover an alleged practice where, for brief periods around the end of Anglo’s financial year, Mr FitzPatrick repaid his large Anglo loans with monies borrowed from Irish Nationwide Building Society, but reversed those transactions days later.
The net result was large loans otherwise due from Mr Fitzpatrick were moved from Anglo’s balance sheet, creating the impression he owed less than he actually did, the bank claims.
They were called “bed-and-breakfast” transactions, it is alleged, because INBS provided temporary accommodation for the loans until they returned to their “true” home in Anglo.
It is claimed EY had access to documents evidencing the FitzPatrick loans, including a certificate of income and salary and a letter relating to his loans.
Had EY made particular inquiries about a letter provided to them by Mr FitzPatrick on November 29th, 2006, and a schedule attached to that, the BB arrangements would have been disclosed, the bank claims. The audit work by EY on directors loan transactions fell below the relevant auditing standards, it is alleged.
The practice came to light in 2008 when, due to market turmoil, Mr FitzPatrick could not refinance his loans with INBS “as had become usual”, the bank claims. He resigned as Anglo chairman in December 2008.
It is alleged the failure to uncover the BB practice significantly increased Anglo’s exposure to Mr FitzPatrick after the end of the 2006 financial year.
Before the 2006 BB transactions, Anglo had loaned some €69 million to Mr FitzPatrick; after the 2006 annual financial statements were signed on December 5th, 2006, it loaned him another €58 million.
All of Mr FitzPatrick’s loans have been classified impaired, he has been adjudicated bankrupt and the bank expects to suffer losses of “well over €50 million” on the loans, it said.
Solicitors for EY wrote to the bank’s solicitors in January 2011 saying the firm was not aware certain Anglo directors had adopted “the unprecedented refinancing practice with a view to avoiding disclosure requirements”, that was never disclosed to EY and it had “no reason to suspect such activity” based on their previous audit experience.
The action by Irish Bank Resolution Corporation, formerly Anglo, was transferred to the Commercial Court yesterday on consent of both sides by Mr Justice Peter Kelly, who returned it to May.
In the action, the bank alleges breach of duty by the firm in its capacity as its auditors for the year to end September 2009 and “repeated failure” in annual audits over a number of other years to identify and notify it of the loan arrangements of Mr FitzPatrick and his family.