AssetCo Case and the Grant Thornton Defense

I mentioned in a previous blog post yesterday the judgement in the case of the alleged breach of duty by Grant Thornton (GT) when acting as auditors of AssetCo Plc (ASTO) in 2009/10. See https://www.bailii.org/ew/cases/EWHC/Comm/2019/150.html for the full judgement. For those who have not had the opportunity to read all 300 pages of the judgement, here are some interesting points from it:

It was conceded that the audit was negligent in a number of respects, but GT’s defense against the damages claim was based on what it asserted were six “insuperable obstacles”. Some of the key points they made are below:

  1. They deny that if the true accounting position had been known they could have avoided an insolvent liquidation. Indeed they claim that AssetCo was better off not knowing, in 2009 and 2010, the truth of its own position.
  2. They claim that the steps that AssetCo took (a scheme of arrangement) mitigated all their losses and otherwise avoided all harm.
  3. That none of the damage claimed by AssetCo was caused by Grant Thornton but by the directors of the company.
  4. That the Letter of Representation supplied by AssetCo as part of the audits contained falsehoods and hence GT should be relieved of all liability.

They also disputed the quantum of losses suffered by the company and their entitlement to interest thereon.

The judge concluded that GT’s conduct was “not reasonable”, and upheld the claim. The defense that AssetCo were better off not knowing their true financial position is a very remarkable one indeed! How are companies expected to avoid losses if they do not know their true financial position?

But this case is a good example of how civil claims arising from company fraud are simply too expensive to pursue in most circumstances and take much too long to get into court. Expecting civil claims to discourage bad auditing and somehow police audit work is simply not a realistic proposition.

If GT’s defences had been upheld, it would effectively make it impossible to challenge any incompetent audit work however bad it was and however damaging the consequences. If the case does go to appeal, let us hope the judgement is upheld.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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AssetCo, Patisserie, Stockpiling, Warehouses, Sheds, Brexit and Venezuala

A week ago, an award of damages of £21 million plus interest and costs was made against Grant Thornton for their breach of duty when acting as auditors of AssetCo Plc (ASTO) in 2009/10. See https://www.bailii.org/ew/cases/EWHC/Comm/2019/150.html for the full judgement. I understand Grant Thornton may appeal. These are the key sentences in the judgement: “It is common ground that in those years the senior management team at AssetCo behaved in a way that was fundamentally dishonest. During the audit process management made dishonest statements to GT, provided GT with fabricated and massaged evidence and dishonestly misstated reported profits, and provided GT with flawed and dishonest forecasts and cash flow projections. Outside of the audit process, management were engaged in dishonestly ‘overfunding’ assets (i.e. misleading banks as to the costs of new purchases etc so as to borrow more than was permitted), misappropriating monies, dishonestly under-reporting tax liabilities to HMRC, concluding fraudulent related party transactions and forging and backdating documents. GT accepts that it was negligent in a number of respects as the company’s auditor in failing to detect these matters…”

In 2012, AssetCo (ASTO) was forced to make prior period adjustments for 2010 that wiped more than £235m off its balance sheet. AssetCo was, and still is, an AIM listed company now operating in the fire and emergency services sector.

This is undoubtedly a similar case to Patisserie (CAKE). According to a report by Investors Champion, former Chairman Luke Johnson suggests it “has possible relevance for a claim against Grant Thornton” and he will be pushing the administrators to instigate similar action. Let us hope it does not take as long at ten years and millions of pounds in legal costs which administrators may be reluctant to stand.

According to a report in the FT, manufacturers are stockpiling goods at a record rate in anticipation of supply chain disruption from Brexit. Importers are also stockpiling goods – for example Unilever is storing ice-creams and deodorant such as its Magnum ice-cream bars which are made in Germany and Italy. There is also the increasing demand for warehousing by internet retailers, even for smaller “sheds” to enable them to provide next day or even same day delivery.

Big warehouses are one of the few commercial property sectors that has shown a good return of late and I am already stacked up with two of the leaders in that sector – Segro (SCRO) and Tritax Big Box (BBOX). On the 31st January the Daily Telegraph tipped smaller company Urban Logistics REIT (SHED) for similar reasons and the share price promptly jumped by 7% the next day wiping out the discount to NAV.

There has been much misinformation spread about Nissan’s decision to cancel manufacture of a new car model in the UK. They denied it was anything to do with Brexit. This was to be a diesel-powered model and as they pointed out, sales of diesel vehicles are rapidly declining in the UK. The same problem has also hit JLR (Jaguar-LandRover). One aspect not taken into account in many media stories was that Japan has just concluded a free trade deal with the EU. Japanese car manufacturers no long need to build cars in Europe to avoid punitive tariffs. Where will the new vehicle now be made? Japan of course!

There has been lots of media coverage of the politics of Venezuela and its rampant inflation. A good example of how damaging extreme socialism can be to an economy. Over twenty-five years ago it had a sound economy and I had a business trip scheduled to visit our local distributor there. But at the last minute the trip was cancelled after a number of people were killed in riots over bus fares. I never did make it and I doubt I will ever get there now.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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