Manchester Building Society is claiming more than £49m from the Grant Thornton, accusing the accountancy firm of negligence when it audited the society.
The mutual lender said the claim, lodged at a Manchester court, was for “breach of contract, negligence and breach of statutory duty” from 2006 until 2013. It said the claim covered the amount the society allegedly lost because of Grant Thornton’s advice on how to account for interest rate swaps.
In a statement, Manchester Building Society said: “The claim primarily covers Grant Thornton’s advice and audit services relating to the implementation and application of hedge accounting by the society. If the society is unable to reach satisfactory agreement with Grant Thornton the matter will progress to a court hearing.”
A spokesperson for Grant Thornton said: “As a large professional services firm, there are inevitably occasions where we become involved in legal claims. Naturally, our obligations of confidentiality mean that we cannot comment on the detail of any litigation in which the firm is involved.”
The claim covers an accounting problem that the watchdog, the Financial Reporting Council, has been investigating since August 2013.
Grant Thornton resigned as the building society’s auditor in 2013. In April of that year, the society changed the way it accounted for its long-term mortgages and interest rate movements after finding that its previous method did not comply with international accounting standards.
The society was forced to restate its 2011 accounts to reflect a £23.5m reduction in the fair value of its interest rate swaps and £5.4m of swap interest costs. The change sent the society to a £21.9m annual pre-tax loss from the £600,000 profit originally reported.
It had to raise £18m of capital by selling profit participating deferred shares (PPDS) to fill what it called “a material downward restatement” of its reserves caused by the accounting change.
PPDS are shares designed for building societies, which are not allowed to issue ordinary shares, to strengthen their balance sheets. They were devised to let mutual lenders increase their capital to absorb potential losses such as from falling property values.
Manchester is Britain’s 16th biggest building society with 29,000 investing members and 5,700 borrowing members.
Interest rate swaps are a form of insurance that is meant to protect the buyer against fluctuations inrates.
