Whistleblower alleges ‘largest sustained book cooking in UK financial history’

In Article Library by Ian Fraser1 Comment

By Ian Fraser

Published: Sunday Herald

Date: 20 February 2011

A CORPORATE whistleblower’s eight-year battle over his claims that Scottish Widows policyholders were deprived of £1.5 billion during the Lloyds takeover is to be the subject of an English high court hearing.

Graham Senior-Milne, a former internal auditor at Lloyds TSB and Scottish Widows, is seeking a judicial review of the alleged failure of the Institute of Chartered Accountants England & Wales (ICAEW) to investigate his complaints about life-insurance company audits. The high court will meet in Berwick-upon-Tweed on March 2, the first time it has sat north of Leeds.

Senior-Milne argues that Scottish Widows and its auditors PricewaterhouseCoopers (PWC) failed, before the takeover of the former by Lloyds, to recognise the consequences that the Court of Appeal’s decision over Equitable Life would have on the Edinburgh-based insurer’s balance sheet. The Lords found that Equitable Life had to honour promises it had made to so-called guaranteed annuity rate (GAR) policyholders. The ruling meant that items treated as contingent liabilities on the Scottish Widows balance sheet, audited by PwC, ought to have been treated as actual ones, which had serious consequences for the company’s value and would have influenced policyholders’ decision to vote the demutualization and takeover through.

Senior-Milne blew the whistle at Lloyds at the time, arguing that standard policyholders were cheated out of £1.5bn. They had been led to believe that, if they approved the demutualization, they would receive £6bn. But Lloyds used £1.5bn of the sale proceeds to pay off GAR policyholders, meaning that ordinary policyholders received only £4.5bn.  Senior-Milne raised the alarm internally following written advice from ICAEW, of which he remains a member, but was sacked by Lloyds in December 2003, three years after the takeover was completed.

He also contends that the ramifications of the Equitable Life decision were never properly acknowledged in the financial accounts of other UK life companies which had similar if not larger GAR liabilities at the time, ultimately depriving their standard policyholders of an estimated £14bn.

He believes that auditors should have qualified the accounts of eight other major companies, thought to have included Friends Provident, Scottish Life, Scottish Mutual and Scottish Provident. He told the Sunday Herald: “This is the largest sustained cooking of the books in the history of financial reporting in the UK. Customers of life companies faced were cheated out of more than £14bn.”

But despite complaints to the FSA, the ICAEW and the Treasury Select Committee he has never managed to trigger an investigation. “My primary objective is to ensure those who have a duty to protect the public actually do so. At the core of all this is a very simple issue it is the integrity of the audit and accounting profession, whose multiple failures are increasingly being recognised as the primary cause of the global banking collapse. Auditors have sold out. They have lost sight of their critical duty to report the truth. Instead their focus is on serving the interests of the biggest corporate customers and growing their own global businesses. If we don’t restore trust in auditing, we stand no chance of addressing the fundamental problems that caused the banking crisis.”

Senior-Milne, who has a website at happywarrior.org, complained to the ICAEW about the auditors of the life insurance companies twice, but was rebuffed both times. He will argue before the court that these moves breached the institute’s own bylaws, which say it must investigate a complaint from a member about another member or demonstrate that it lacks merit.

He said: “Scottish Widows should have shown an actual liability of £1.5bn ahead of the sale to Lloyds TSB. But there was no mention of this in the accounts. Nor was there any mention of the Equitable Life court case or its repercussions in the Scottish Widows demutualisation circular. Nor was there any mention of the size of the GAR liability, and/or an assessment of these issues by the Scottish Widows board.

Senior Milne added: “The ICAEW has been ducking and diving in order to avoid addressing the issue — which is that life company auditors let policyholders down by failing to qualify their clients’ accounts given the Equitable verdict, and especially given the outcome of the institute’s own investigation into Ernst & Young’s auditing of Equitable Life. There is a surreal quality to this whole charade. The institute is desperate to avoid having to open this can of worms.

“If I do succeed in prising it open, the institute is going to have to investigate the audits of the other eight life companies. And the Equitable Life crisis took a dozen investigations and 10 years to resolve.”

The ICAEW said: “It is for the court to decide on the merits of Mr Senior-Milne’s application, and it would not be appropriate for ICAEW to comment at this stage.”

PWC and Lloyds also declined to comment.

An edited version of this article was published under the headline “Whistleblower to get his day in court after allegations that policyholders missed out on billions” in the Sunday Herald