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Grant Thornton ordered to pay £315,345 over negligence
The accountancy firm Grant Thornton has been ordered to pay damages of £315,345 after providing negligent advice to Manchester Building Society.
However, it was not liable for the losses incurred following that advice.
The High Court heard that Grant Thornton audited the society’s accounts from 1997 until 2012. In 2006, the society began a policy of hedging lifetime mortgages by entering into 50-year interest rate swaps. The 2008 financial crisis led to a sustained fall in interest rates.
In 2013 the society found that hedge accounting was not permitted under International Accounting Standard 39 (IAS39), and that its profits and losses were exposed to the full movement in the fair value of the swaps.
As a result, its profit for 2011 became a loss; its net assets were substantially reduced; and its regulatory capital position was affected so that it had a deficit of £17.9m. It was forced to close out the swaps, stop lending and sell its book of UK lifetime mortgages.
Grant Thornton admitted that, before signing an unqualified audit opinion for each of the years 2006-2011, it had negligently advised that the society's hedge accounting policy complied with IAS39 and had negligently conducted the audits of the accounts for the years ending 2006-2011. The society sought damages of £48.5m. The High Court held that although Grant Thornton had provided negligent auditing advice in relation to the availability of hedge accounting, it had not assumed responsibility for the losses incurred when the society was obliged to break long-term swaps.
Such losses flowed from market forces for which Grant Thornton did not assume responsibility and were not recoverable as damages.
However, the firm was liable for "termination" or "penalty" costs of breaking the swaps together with other factors which led to a total compensation figure of £315,345.
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