Equitable Accounting

The new UK government, unkindly called the Lib-Con coalition, has started work already. Amongst its first measures, aside from reducing the salaries of ministers by 5%, has been the announcement that the members of Equitable Life are to receive compensation as recommended by the Parliamentary Ombudsman. Equitable Life, before its takeover by Halifax Building Society (subsequently HBOS and then the Lloyds Banking Group) had its headquarters in Aylesbury as does the Accounting and Bookkeeping College.

The members of Equitable Life were certainly misled. Each year the directors declared dividends for the with-profits members that were outstanding by the standards of the pensions industry. Very few alarm bells rang until Equitable Life lost a court case brought by a group of investors who believed they were entitled to guaranteed annuity payments. When Equitable Life had sold these annuity contracts its actuaries had seriously miscalculated how expensive the obligations would be. Suddenly it was clear that there wasn't unlimited cash in the pot and the members would have to go short. So little cash, in fact, that Equitable Life was effectively bust.

Throughout this story there was precious little evidence of supervision by the financial authorities. Initially some aggrieved members were looking to the auditors, Ernst & Young, for not sounding the alarm. Auditors had taken the blame for previous corporate fiascos like Enron and seemed like a promising source of funds for the aggrieved. Ernst & Young, however, had a cast iron defence: the convention in the financial services industry, which they were bound to follow, was that the auditors should only examine the assets of the business because auditors are not actuaries and they would not be able to form a worthwhile opinion on the liabilities which, in this case, would be the amount due to be paid out in pensions. Ernst & Young had duly tested Equitable Life's assets and found the figures in the accounts to be true and fair. The directors' error had been in understating the liabilities.

As ever, this one-sided form of accounting could not tell the whole truth or, in this case, anything like the truth. An absence of regulation can only be the responsibility of the regulatory authorities, if any, so the members of Equitable Life resorted to parliament and the Financial Services Authority. The Parliamentary Ombudsman has correctly ruled in their favour. The country will carry the cost, or at least some of it, of this failure.