Wash. Commissioner Files Suit Against Ernst & Young

October 20, 2004

Washington Insurance Commissioner Mike Kreidler, acting in his capacity as the court-appointed receiver of Western United Life Assurance Company, has sued the company’s former auditor for damages, claiming negligence, negligent misrepresentation and breach of contract.

The lawsuit, naming Ernst & Young LLP, was filed last week in Spokane County Superior Court.

Kreidler assumed control of Western United last March to assist the company and to deal with financial issues related to a parent holding company. A month earlier, the holding company, Metropolitan Mortgage & Securities Co., Inc., and its affiliate, Summit Securities, Inc., filed voluntary petitions for bankruptcy.

Western United was ordered into receivership for the purpose of rehabilitation, two months after Ernst & Young resigned as the company’s auditor.

“Ernst and Young failed to do its job, so it’s my duty as receiver to pursue legal action to protect Western United and its policyholders,” Kreidler said.

An independent examiner in Metropolitan’s bankruptcy proceedings issued a report in June that was reportedly sharply critical of Ernst & Young’s work as the auditor for Western United, Metropolitan, Summit and affiliated companies.

Among the criticisms, the examiner detailed Ernst & Young’s failure to properly identify deficiencies in the internal controls and the management and accounting practices of the companies. The examiner also criticized Ernst & Young’s approval of the accounting treatment for certain major transactions.

Kreidler’s lawsuit states that the Office of the Insurance Commissioner (OIC), in its regulatory role, relied upon financial statements that were audited by Ernst & Young.

Western United reportedly suffered substantial damages as a result of Ernst & Young’s violation of applicable accounting and auditing standards and its breach of duties owed to both Western United and the Office of the Insurance Commissioner, according to the lawsuit. The lawsuit seeks recovery of these damages – currently estimated in the millions of dollars – as well as the costs incurred in the rehabilitation of Western United and prosecution of this case.

“I don’t like being misled as the regulator,” Kreidler said. “As the receiver of Western United, the OIC is in charge of its full rehabilitation, and I want to make it clear that we are aggressively pursuing the court’s mandate to rehabilitate this company.”

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