PwC sued for failing to spot alleged fraud at race car dealership
PwC has been sued by the directors of racing car dealership JD Classics over allegations the Big Four company failed to spot the fraud, causing losses of more than £41million.
The directors of Alvarez & Marsal have accused the UK’s largest accountancy firm of failing to audit JD Classics’ 2016 and 2017 accounts competently, leading to material misstatements in the dealer’s finances which allowed it to to accumulate costly liabilities.
The claim in the High Court in London comes as the audit profession faces continued scrutiny for failing to raise red flags ahead of a business collapse in the UK.
EY is facing a potential legal claim of over £1billion over its audits of NMC Health, the FTSE 100 hospital operator which collapsed in an alleged multi-billion dollar fraud. Carillion liquidators have secured funding for a £250m lawsuit against KPMG over its audits of the collapsed government contractor.
Prior to filing for administration in September 2018, JD Classics restored and sold classic cars and was associated with top-level racing such as Le Mans Classic. Its operating company reported a pre-tax profit of £20.7million on sales of more than £138million in the year to April 2017, the last year for which it filed accounts.
The collapse of the dealership, which had showrooms in Mayfair in London, Maldon in Essex and Newport Beach in California, also led to a civil fraud claim by directors against its founder Derek Hood, who denies wrongdoings.
The directors alleged that despite identifying a “real risk of fraud”, PwC failed to detect that the true state of the business was being concealed, leading it to negligently issue notices of unqualified audit of the 2016 and 2017 accounts.
The lawsuit alleged that revenues and profits were overstated because JD Classics recorded sales that did not occur in the same fiscal year and that the company’s stock was inflated because it included assets it did not own. not.
The inclusion of ‘fictitious’ transactions in the 2016 accounts resulted in JD revenue of £121.8m, an overstatement of £63.1m and pre-tax profits of £21.1m sterling instead of the actual figure of just over £702,000, the lawsuit alleged. The company’s assets were overstated by £43.6million, they added.
PwC, which audited the car dealership from 2015 to 2018, had designed an audit strategy that failed to consider key risks and failed to exercise sufficient professional skepticism in its work, the lawyers claimed.
“If PwC’s audit had been competently performed in accordance with applicable accounting standards. . . material misstatements in the financial statements would have been identified,” wrote attorneys for the directors.
Administrators claimed PwC’s audits for the year to April 2016 resulted in losses and damages of £26.1 million, while its review of the 2017 financial statements resulted in losses of £15. £2 million.
The claim includes a claim for damages and the administrators’ legal costs.
PwC said: “We do not believe this assertion is substantiated and we will vigorously defend it.”
A lawyer for Hood said he continues to vigorously deny and fully deny the directors’ allegations of fraudulent conduct. Hood was “committed to defending his reputation at trial and is confident of his vindication,” he added.