PwC sued for failing to spot alleged fraud at racing car dealer

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PwC has been sued by administrators of racing car dealership JD Classics over allegations the Big Four firm negligently failed to spot fraud, causing losses of more than £41m.

Administrators from Alvarez & Marsal accused the UK’s biggest accounting firm of failing to audit JD Classics’ 2016 and 2017 accounts competently, resulting in material misstatements of the dealership’s finances that allowed it to build up costly liabilities.

The claim in London’s High Court comes as the audit profession faces continued scrutiny for failing to raise red flags ahead of company collapses in the UK.

EY faces a potential legal claim for more than £1bn over its audits of NMC Health, the FTSE 100 hospital operator that collapsed in a suspected multibillion dollar fraud. Liquidators of Carillion have secured funding for a £250m lawsuit against KPMG over its audits of the collapsed government contractor.

Before filing for administration in September 2018, JD Classics restored and sold classic cars and was associated with high-profile races such as the Le Mans Classic. Its operating company reported a pre-tax profit of £20.7m on sales of more than £138m in the year to April 2017, the final year for which it filed accounts.

The collapse of the dealership, which had showrooms in Mayfair in London, Maldon in Essex, and Newport Beach in California, has also led to a claim of civil fraud by the administrators against its founder Derek Hood, who denies wrongdoing.

The administrators alleged that despite identifying a “real risk of fraud”, PwC failed to detect that the true state of the business was being concealed, resulting in it negligently issuing unqualified audit opinions of the 2016 and 2017 accounts.

The lawsuit alleged that revenue and profit were overstated because JD Classics had recognised sales that had not occurred in the same financial year and the company’s stock was inflated because it included assets that it did not own.

The 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 alleged. The company’s assets were overstated by £43.6m, they added.

PwC, which audited the car dealership from 2015 to 2018, had designed an audit strategy that failed to address key risks and had not shown enough professional scepticism in its work, the lawyers claimed.

“Had PwC’s audit been performed competently in accordance with the applicable accounting standards . . . material misstatements in the financial statements would have been identified,” lawyers for the administrators wrote.

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.

The claim includes a demand for damages plus interest as well as the administrators’ legal costs.

PwC said: “We don’t believe this claim has merit and will be vigorously defending it.”

A lawyer for Hood said he continued to strenuously deny and fully contest the administrators’ allegations of fraudulent conduct. Hood is “determined to defend his reputation at trial and is confident of vindication”, he added.