The competency of PwC’s audits of classic and racing car dealer JD Classics may be questioned in the High Court after administrators from Alvarez & Marsal alleged the accountancy firm failed to spot fraud.
The Financial Times (FT) reported today (July 27) that Alvarez & Marsal is suing the Big Four firm over allegations that it negligently failed to spot fraud in the retailers’ 2016 and 2017 accounts – resulting in losses of more than £41m.
It alleges that shortcomings in its processes allowed material misstatements of the dealership’s finances that allowed it to build up costly liabilities.
The FT said the case against PwC was the latest in a series against the audit sector’s key operators.
It also comes four months after UK accounting watchdog the Financial Reporting Council (FRC) opened an investigation into Deloitte audit of Lookers PLC’s financial statements for 2017 and 2018.
JD Classics, which had showrooms in Mayfair in London, Maldon in Essex, and Newport Beach in California, collapsed in September 2018.
The Essex-based operation encountered financial difficulties after a classic car collector who claimed to have “suffered catastrophic losses” during the trading of 41 vehicles begun legal proceeding against former owner, Derek Hood.
Hood still denies any wrongdoing.
The FT reported that the car retail business’ administrators allege that inclusion of “fictitious” transactions in the 2016 accounts resulted in JD reporting revenues of £121.8m, an overstatement of £63.1m, and pre-tax profits of £21.1m instead of the true figure of just over £702,000.
The lawsuit also alleges that the company’s assets were overstated by £43.6m.
The administrators claimed PwC’s audits for the year to April 2016 had resulted in loss and damage of £26.1m while its scrutiny of the 2017 financial statements resulted in losses of £15.2m.
PwC told the FT that the case against it was without merit, adding that it will “vigorously defending it”.
A lawyer for Hood said he continued to strenuously deny and fully contest the administrators’ allegations of fraudulent conduct. Hood was “determined to defend his reputation at trial and is confident of vindication”, he added.