Updated Court actions against Deloitte, EY, KPMG and PwC
Edmund Tadros and Hannah Wootton
Updated Apr 27, 2022 – 5.50pm,
*first published at May 7, 2019
The big four consulting firms Deloitte, EY, KPMG and PwC have faced, or are facing, a range of court actions over their auditing and advisory work. A summary of the key cases is listed below. It was last updated April 26, 2022 with details of case where shareholders in failed mining company CuDeco are suing KPMG for misleading and deceiving the market in its audits of the collapsed outfit.
Ongoing:
Deloitte and Freedom Foods
Slater and Gordon has launched an investor class action against Freedom Foods Groupand its auditor Deloitte in the
The class action is brought on behalf of shareholders who acquired securities in Freedom Foods Group between December 7, 2014 and June 24, 2020.
The cereals, snacks and UHT milk manufacturer revealed on November 30 more than $590 million in write-downs and restated several years' worth of accounts.
The class action alleges that Deloitte failed in its duties in signing off on Freedom Foods’ accounts each financial year between 2014 and the first half of 2020. Deloitte has itself identified significant irregularities in the company’s accounts going back a number of years as part of the 2020 financial report issued on November 30, it added.
The matter is before the Supreme Court of Victoria.
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Deloitte and Hastie
Deloitte faces a class action in the Federal Court by law firm Phi Finney McDonald on behalf of investors, the Sadie Ville super fund, in building services group Hastie, which went into administration in May 2012, reportedly $967 million in debt.
The case alleges that from August 2010 to August 2011, Deloitte breached both the Corporations Act and Australian Consumer Law by making false and misleading statements in signing off on Hastie’s full and half-year financial statement audits and reviews and financial information in prospectus documents.
After audit partners involved in the Hastie matter successfully claimed privilege against self-incrimination over the production of material related to the case, it fell to "uninvolved partners" to comply with a court order to produce the documents.
The court met with resistance when the "uninvolved partners" applied to be excused from the production order because the material was inaccessible in the hands of one of the audit audit partners who had claimed privilege, Reuben Saayman.
In February, the Deloitte partnership appealed to the full Federal Court over the production order, arguing that all partners should be able to claim privilege.
They lost the case in February 2020, in a judgment that slammed both Mr Saayman's and Deloitte's conduct.
The court said Mr Saayman displayed "outrageous and contumacious" conduct that bordered on contempt, and that "Deloitte's conduct was not much better".
It also described the firm's evidence as "carefully contrived", "staggering" and "absurd".
Sadie Ville expanded its claims in March to include information from these documents, sparking a fight between the parties about the dates these new allegations were brought as that may trigger limitation periods for actions. Deloitte said the information contains new legal claims.
The matter is before the Federal Court.
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EY and Shepparton Partners Collective
EY is facing a negligence action for allegedly making inaccurate and misleading statements about SPC, which was Coca-Cola Amatil’s fruit processing arm at the time, before its sale to Shepparton Partners Collective in 2019.
The group claims that EY overstated SPC’s inventory in due diligence reports, leading to financial loss for the Collective.
It claims it relied on the accuracy of these reports when it agreed to pay over $100 million for the company and its assets in 2019, but alleges these were not completed to a standard that met accounting rules.
The matter is before the NSW Supreme Court.
EY and Pitcher Partners
EY has alleged its national rival Pitcher Partners engaged in misleading and deceptive conduct and negligence in its 2015 audit work for plaintiff law firm Slater and Gordon before its near collapse.
Pitcher Partners has also filed a claim against EY, claiming that it only signed off on Slaters’ 2015 audit because of allegedly poor information provided by the big four firm in its work on Slaters’ UK activity.
Both cross claims form part of a long-running class action over plaintiff law firm Slaters’ 2015 troubles, which left it on the brink of insolvency and allegedly lost investors about $250 million.
The matter is before the Federal Court.
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EY and LM First Mortgage Income Fund
EY's auditors are battling a civil case where they are accused of botching the oversight of valuations for fizzled property fund LM First Mortgage Income Fund.
The civil case has been brought by receiver David Whyte of BDO for the LM First Mortgage Income Fund, which collapsed in 2013 after raising almost $400 million from investors.
The firm and auditor Paula McLuskie is accused of failing to check whether valuations were up to date or had properly accounted for a real-estate rout. EY auditor Michael Reid and the firm are also targeted over their alleged oversight of compliance plans for the fund.
Lawyers for the EY auditors have argued a real risk exists that any adverse civil ruling from the lawsuit could flow on to a “penalty or criminal action".
The matter is before the Queensland Supreme Court.
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EY and Quintis
Two shareholder class actions over sandalwood grower Quintis, targeting the company and EY, continue to wind their way through the Federal Court.
Three class actions about the collapse have now been consolidated into two matters. The consolidated case alleges that certain matters were not disclosed to investors in breach of the company’s disclosure obligations.
The third class action alleges Quintis improperly inflated the value of its Indian sandalwood trees which represent the group's biological assets and did not comply with relevant accounting standards. This third claim also alleges that Quintis’ auditor EY "engaged in conduct that was misleading or deceptive, and was negligent" and that the financial reports issued by Quintis and audited by EY did not accurately depict the financial position of the company.
EY said in its defence that if it is found liable for its audit, then Bentleys Audit & Corporate in Perth, which audited Quintis in 2013 and 2014, is a “concurrent wrongdoer”.
The company went through a Deed of Company Arrangement last year which means the only assets available to meet any successful shareholders claims are limited to any insurance Quintis may have. The EY case is not affected by this move.
The consolidated case is funded by Ironbark and run by Gadens and the third case is funded by Litigation Capital Management and run by Piper Alderman partner Simon Morris.
The matter is before the Federal Court.
KPMG and Arrium
KPMG is one of several defendants (the others being Arrium directors) fighting a shareholder class action by investors in the collapsed steel maker Arrium.
The claim alleges that KPMG made misleading or deceptive statements in Arrium’s published financial results by suggesting they complied with Australian accounting standards and were a true and fair view of Arrium’s financial position. It also claims that the firm misled or deceived investors about whether those statements fully disclosed material impairments of Arrium’s assets.
The shareholders claim this led to Arrium’s shares trading at an inflated price from 2014 - 2016 and also meant that a September 2014 capital raising took place at an overblown price.
The matter is before the Victorian Supreme Court.
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KPMG and CuDeco
Shareholders in failed mining company CuDeco have accused KPMG of misleading and deceiving the market in its audits of the collapsed outfit.
In a statement of claim filed with the Federal Court, the disgruntled investors claim that KPMG failed to act with due care and skill, making representations about CuDeco’s financial reports that were “materially misleading” and “not based upon reasonable grounds”.
The class is also suing the liquidated company itself and its former directors Noel White, Peter Hutchison and Dianmin Chen, alleging they misled investors about the value of ore reserves in CuDeco’s Rocklands mines.
The CuDeco investors alleged that KPMG broke several consumer and corporations laws in its FY2016 and 2017 audits of the company’s financial reports, which it alleged breached ASX listing rules.
CuDeco’s 2016 annual report valued the company’s mining assets at $352 million, but the court was told that this did not factor in a $218 million impairment because of changes to a mine plan which excluded cobalt and magnetite mining.
The shareholders’ statement of claim said the 2017 annual report did not factor in this information either, meaning the company seemed significantly more valuable that it was. CuDeco collapsed in 2018.
The matter is before the Federal Court.
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PwC and Aoyin
Chinese lender Aoyin claimed it wasted $5 million trying to establish a locally incorporated bank in Australia because of flawed advice from PwC.
Aoyin is being sued by PwC, which claims it is owed $300,000 in fees in connection with that advice while its consulting arm is owed $128,000 for technology services.
Aoyin is counter-suing and claims PwC failed to act with reasonable care and skill, breached its retainer and engaged in misleading and deceptive conduct.
The matter is before the NSW Supreme Court.
PwC and Axsesstoday
PwC is facing a class action from bondholders of its collapsed audit client Axsesstoday over allegations of shoddy accounting work by the big four consultancy.
Listed lending company Axsesstoday went into voluntary administration in April 2019 after breaching its loan term conditions, but a prospectus given to bondholders in June 2018 suggested Axsesstoday was not at risk of breaching any loan or debt obligations.
Bondholders are now alleging that PwC, who did accounting work on the prospectus, failed to adequately consider changes to accounting standards that meant the company's assets, liabilities and expected losses would be measured differently from July 2018.
The matter is before the Federal Court.
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PwC and the Commissioner of Taxation
PwC incorrectly claimed legal privilege over the majority of documents it tried to keep from the Tax Office over its work for a multinational client, the Federal Court has ruled in landmark case that went to the core of major professional services firms’ business models.
Justice Mark Moshinsky found that 58 per cent of PwC’s claims of privilege over a slew of documents regarding tax advice it gave meat production giant JBS were wrong, after the ATO claimed it involved lawyers in the work purely to cover it in “a cloak of privilege”.
The judge did not find there was a blanket rule either extending or removing legal privilege over tax work completed by multidisciplinary firms. Claims needed to be considered on a document-by-document basis, he said.
The case is part of a push by the ATO to force more transparency from the big four around their work for multinational companies, after a slew of cases in which the firms used increasingly novel interpretations of legal privilege to withhold tax and auditing information from regulators and shareholders.
The matter is before the Federal Court.
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PwC and Cornerstone
The Supreme Court of NSW has struck out a $43 million professional negligence suit against Australia’s biggest auditor PwC by failed education provider Cornerstone, but the collapsed firm will be allowed to file an improved claim.
Cornerstone alleged PwC failed to meet Australian accounting and auditing standards in their work valuing the company, as well as breaching the Corporations Act and its contract with the company.
It claimed that PwC assisted its former director Jin Heung Yang in overstating its revenue to enable him to receive a $30 million-plus dividend as Cornerstone’s sole shareholder.
The failed company said this meant it could not recover a debt owed by Mr Yang of the same amount, as well as forcing it to wrongly pay millions of dollars in income tax.
PwC slammed the case as inaccurate, and successfully applied to have it struck out, but the NSW Supreme Court gave it a second chance to improve the lawsuit. It will file an amended pleading by December 10.
The matter is before the Supreme Court of NSW.
Finalised
2022 - KPMG and Greg Eldridge
KPMG director Greg Eldridge sought more than $100,000 in compensation, alleging the firm failed to protect him from “aggressive” attacks from a female partner.
KPMG refuted the allegations. The case settled in March 2022.
2022 - Deloitte and Aircraft Leasing IV, GECAS Australia
A handful of aircraft lessors have failed to convince the NSW Supreme Court that some of their claims against the once-teetering Virgin Australia should be moved further up the creditor queue than its administrators allowed.
Justice Ashley Black ruled the Deloitte administrators – led by restructuring lead Salvatore Algeri – were correct to admit various rent and maintenance cost claims registered by nine lessors as unsecured debt when distributing funds from the $3.5 billion sale of Virgin to Bain Capital in a creditors’ trust.
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2021 - EY and Penrice Soda Holdings
EY’s audit division has been accused of fraud and deceit in a civil claim in the NSW Supreme Court.
Investment group London City Equities alleges EY failed to conduct successive audits over a six-year period with due care and skill.
London City bought about $7.6 million worth of shares in the now-liquidated miner Penrice Soda Holdings in 2007 and 2008, and is suing EY for damages over its losses on this investment. Investors rarely sue auditors themselves, with class actions against the firm more common.
London City said it only acquired the shares because it believed EY’s allegedly misleading audited financial reports on the company to be accurate.
An independent forensic accountant, commissioned by London City, quantified the losses at $11.9 million in September, 2020.
The figure, which includes the damages suffered by both London City and two other related plaintiffs, takes into account both economic and likely investment scenarios, and does not include the substantial legal costs associated with the case.
In December, 2021, London City Equities settled the case with EY for an undisclosed amount.
“On 9 December 2021, at a court ordered mediation, a confidential settlement was reached with Ernst & Young of Supreme Court Proceeding 2017/145976 (Proceedings). The compromise reached by the parties reflected the relevant commercial and legal risks in continuing the proceedings,” according to a statement from London City Equities.
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2021 - PwC and Zilzie Wines
PwC faced allegations that its tax advice was below industry standards, was not fit for purpose, and was not undertaken with due care or diligence by appropriately skilled staff in a case filed by South Australian wineryZilzie Wines.
The Federal Court case, brought by the Forbes family who own Zilzie in December 2020, targeted PwC’s research and development tax division.
It alleged that the quality of the tax advice it received from PwC over applications for research and development tax relief in 2014 and 2015 breached both contract and tort law after a government audit found none of the claims were valid.
Zilzie also alleged that PwC broke consumer law by saying its staff were specialists in R&D tax claims and had achieved results for other wine companies, when this was allegedly not accurate.
PwC settled the matter for an undisclosed amount in August, 2021.
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2021: PwC and Vocation
A long running class action brought by investors in collapsed education outfit Vocation against both the company and its auditor PwC settled for $50 million in July 2021.
Vocation closed in November 2015, after the government stripped it of almost $20 million in business, citing poor training quality, and 94 per cent of its stock value was wiped off.
PwC was added to the class action in March over its 2014 audit of Vocation. PwC also filed cross-claims against several Vocation directors and the education provider’s law firm at the time of the audit, Johnson Winter & Slattery.
PwC’s partners claimed privilege against self-incrimination to stop their having to produce documents related to its audit work as part of the case, but it settled before the Federal Court made a decision on the claim.
PwC partner Stephen Bourke, the lead auditor for Vocation’s 2014 report, saw his audit registration cancelled in late 2017. He has retired as an auditor but remains at the firm as a partner.
2021: Deloitte and Colin Brown
Deloitte has settled an age discrimination case brought by partner Colin Brown over allegations he was forced out of the partnership when he reached 62, nipping in the bud what was shaping into a landmark legal challenge to its partnership agreements.
The terms of the settlement were confidential, but The Australian Financial Review understands that Deloitte agreed to a pay a multimillion-dollar sum to settle the case. Mr Brown will leave the firm at the end of the month as part of the deal.
Mr Brown, who was originally seeking more than $3 million in damages, had alleged the firm had a policy of making partners retire at 62, in breach of the Age Discrimination Act. He said the firm had illegally tried to force him out of the lucrative partnership because of his age and moved him onto a “consultancy agreement” that cut his annual income from $750,000 to $400,000.
The case had been expected to set a precedent for the long-running retirement practice at Deloitte and in the broader professional services sector, with legal experts suggesting that dozens of partners could have had grounds for similar claims, had Mr Brown won.
In a defence filed by Deloitte in February, the firms admitted it has an “expectation” that partners will retire at 62 years of age but claimed this did not mean partners were obliged to do so.
The Queensland partner had sought information from Deloitte about other partners who had retired within two years of their 62nd birthdays since mid-2013, with the firm ordered to hand over any communications with such partners. It failed in its attempts to have the court throw out the request.
The documents, which would have shone a light on how retiring partners are treated, covered another 29 former Deloitte partners, all of whom may may have been affected by the now-settled action.
The documents were set to be filed in coming weeks, after Federal Court judge Angus Stewart last month dismissed delays by Deloitte in producing them as “bizarre” and not “sensible”.
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2021: PwC and Jennifer Whittaker
Former PwC employee Jennifer Whittakerhas settled a case against the firm weeks before the matter was due to go to trial in the Federal Court.
Ms Whittaker, a former director at the firm, had alleged the professional services giant breached workplaces laws by refusing to grant her personal leave when she was injured and unable to work within days of the firm deciding her role was redundant.
The terms of the settlement were confidential.
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2021: Deloitte and Dick Smith
The collapse of retailer Dick Smith led to three class actions. The first two class actions were known as the Findlay and the Mastorisactions.
In mid-2019, Deloitte failed in a bid to strike out a number of claims made by the two actions alleging the big four consulting firm’s accounting work on Dick Smith was negligent.
In November, 2019, the Findlay and the Mastoris actions dropped select cross-claims against Deloitte and other parties.
The Findlay shareholder class action is being funded by Vannin Capital and run by Corrs Chambers Westgarth. The Mastoris shareholder class action is being funded by Investor Claim Partners and run by Johnson Winter & Slattery.
A third Dick Smith class action, the POSI Insurance class action seeks “declarations that [the] insurers of Dick Smith” are liable for “certain liabilities in the Mastoris Class Action and the Findlay Class Action”, according to the class action information page.
In December, 2020, a $25 million settlement proposal was made in the three Dick Smith class actions. The proposed settlement was labelled “disappointing ” but accepted Supreme Court Justice James Stevenson in March, 2021. Deloitte’s portion of the settlement was not disclosed.
2019: KPMG and Discovery Metals
KPMG has settled a class action with Discovery Metals shareholders over allegations the firm's advisory arm provided an independent expert report that contained misleading advice to the board of the failed junior miner.
The terms of the settlement, which included a confidential financial sum KPMG has agreed to pay, were approved at a NSW Supreme Courthearing scheduled on May 27, 2019.
KPMG denied the allegations and agreed to the settlement "without any admission of liability". The class action was funded by Litigation Capital Management and run by Piper Alderman partner Simon Morris.
2019: KPMG and Equititrust
KPMG settled in mid-2019 two long-running cases in the Federal Court against the firm over its auditing of the collapsed fund manager Equititrust.
Equititrust liquidations Hall Chadwick had filed the first action against KPMG in 2013. All of the settlement amount would go to the case funder, International Litigation Partners.
2019: Deloitte and Ashley Services
The Federal Court approved a $14.6 million settlement in a class action with private training provider Ashley Services, its auditors, Deloitte and Grant Thornton, and Holmes Management Group in June.
Both Deloitte and Grant Thornton reviewed financial forecasts in Ashley Services’ prospectuses, which allegedly omitted material information about the risks posed to the company’s future revenue by a company it acquired in 2014 and a government training program.
The settlement meant that a cross-claim against Deloitte in the class action was dismissed, although the proportion of the settlement paid by the big four firm is unknown. A cross-claim against Grant Thornton was also dismissed, as was a separate cross-claim filed by the firm against Ashley Services.
