Bloomberg News

Cattles Claims ‘Gross Misstatement’ of Debt in PwC Audits

November 04, 2011

(Updates with FSA spokesman in fifth paragraph.)

Nov. 2 (Bloomberg) -- Cattles Plc, the U.K. subprime lender sold this year to creditors including Royal Bank of Scotland Group Plc, accused PricewaterhouseCoopers Plc of accounting failures before its shares were suspended in 2009.

Cattles has claims against PwC tied to the firm’s audits of its finances from 2005 through 2007 that could result in “substantial damages,” according to an outline of the case by Judge Henry Bernard Eder in London, who ruled yesterday on preliminary issues. The company said PwC’s audit led to a “gross misstatement” of the company’s bad debt.

While an official complaint hasn’t yet been filed, Cattles was awarded some legal costs against PwC in an evidentiary dispute. Cattles claims groups of loans that were “ostensibly” set aside for debt collection were in reality just buckets for bad debt, Eder said in the ruling, which didn’t address the merits of the case. “Once the misstatements became clear, the group could not continue trading and became worthless.”

The company, based in Batley, England, lent to customers with poor credit histories and is winding down its loan book after recording an extra 700 million pounds ($1.12 billion) of writedowns following the audit irregularities.

Britain’s accounting regulator has been probing PwC’s handling of the disputed audits since 2009 and the U.K. Financial Services Authority started an investigation of Cattles the same year, a person familiar with the situation said at the time. FSA spokesman Christopher Hamilton declined to comment in a phone interview today.

Deferred Loans

Cattles alleges PwC rewrote or deferred loans that were in long-term arrears instead of listing them as impaired, Eder said. When the problem was discovered, Cattles said it was forced to report a loss in 2008 of 745 million pounds and restate its earnings from the previous year to a loss of 98.5 million pounds, from a profit of 165.3 million pounds.

PwC spokesman David Jetuah PwC said the firm wasn’t aware of a claim against it and will vigorously defend its work.

Paul Marriott, a spokesman for Cattles, declined to say how much the company may seek in damages.

The financial troubles at Cattles led to a ruling by the U.K. Supreme Court in July 2010 that the company’s bondholders can only be repaid once the subprime lender has honored its debts to banks, including RBS, its biggest lender.

Six Cattles executives including two board members were fired in July 2009. Chief Executive Officer David Postings and Risk Director Mark Collins stepped down that month.

--With assistance from Kevin Crowley in London. Editors: Christopher Scinta, Anthony Aarons

To contact the reporters on this story: Erik Larson in London at elarson4@bloomberg.net; Kit Chellel in London at cchellel@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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