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EY fined £2.2m for Stagecoach audit flaws

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Big Four firm EY was fined more than £2m with partner Mark Harvey ordered to pay £70,000 for audit failings at transport company Stagecoach.

26th Aug 2021
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Big Four accounting firm Ernst & Young (EY) was initially handed a sanction of £3,500,000 along with a severe reprimand over failings in its statutory audit of the consolidated financial statements of Stagecoach Group plc (Stagecoach).

The Financial Reporting Council (FRC) discounted the sanction by 30% to £2,205,000 as a result of mitigating factors such as the firm's admissions of responsibility and early disposal.

EY Scotland senior partner and audit engagement partner Mark Harvey also received a fine of £100,000 along with a severe reprimand. This fine, too, was discounted by 30% to £70,000 for similar reasons.

The FRC has ordered the two respondents to pay £596,735 to cover the costs of the investigation.

Audit failings

In 2017 EY took on the audit of international transport company Stagecoach, which operated buses, trains, trams and express coaches.

The disciplinary complaints that EY admitted related to audit shortcomings in three areas :

  • underreporting defined benefit pension scheme obligations by more than £850m 
  • failure to question or interrogate the evidence for provisions for insurance claims totalling £156.8m; and
  • inadequate investigation and documentation of the risks surrounding an onerous contract provision relating to the East Coast Mainline railway franchise.

All three issues involved material balances that were identified as areas of significant risk requiring a heightened response. 

The most serious concerns involved the lack of sufficient evaluation of the audit team’s work and a lack of proper challenge about material assumptions underlying Stagecoach’s financial statements. 

In several instances, EY and Harvey failed to obtain sufficient evidence to apply appropriate professional scepticism in their management of the audits. 

For example, the auditors failed to question assumptions about the pension fund valuations, including estimates supplied by EY's in-house pension advisory group.

When it came to the East Coast Mainline contract provisions that would have significant financial impacts if they were broken, the FRC investgiation found, “The respondents failed to apply proper professional scepticism and consider the possibility of management bias in relation to Stagecoach’s approach to disclosures.”

Overall, the EY audits was shown to be of low quality and did not record the full extent of the procedures undertaken in the three areas subject to investigation. The FRC decided that none of the breaches were intentional, dishonest, deliberate or reckless. But it did find weaknesses the audit process ranging from planning, through substantive testing to reporting to those charged with governance, disclosures in the financial statements and documentation.

“In certain cases the breaches were of a basic and/or fundamental nature, evidencing a serious lack of competence in conducting the audit work,” the FRC disciplinary notice commented.

The FRC executive counsel commented that EY took the relevant steps to identify the root causes of the audit failings, which related to only one audit year. The official also that the firm had undertaken remedial action to address the issues identified.

Claudia Mortimore, deputy executive counsel to the FRC said: “The audit failings in this case were extensive and related to a number of fundamental auditing standards including the requirement to obtain sufficient appropriate audit evidence, adequately evaluate expert evidence, apply sufficient professional scepticism and challenge management, and prepare proper audit documentation.  The sanctions imposed reflect the seriousness of the breaches and are intended to improve the quality of future audits.”

Big Four scandals

Big Four firm EY is already in hot water over its audit of German fintech company Wirecard AG

The CMA published a report this month responding to the Department for Business, Energy and Industrial Strategy (BEIS) in a bid to restore the UK’s trust in audit and corporate governance. 

This comes after BEIS published its consultation findings on proposed reforms including a shared audits proposal, which the Big Four have so far resisted.

This is also not the first time Stagecoach has been involved in financial scandal; 2016 saw the transport firm’s tax avoidance scheme break down when the first tier-tribunal sided with HMRC, costing the company £11m.

At the time, Jim Harra called the incident “clear tax avoidance”, claiming that Stagecoach was simply attempting “to manufacture losses to deny the public purse the tax due”.

Replies (10)

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By Justin Bryant
26th Aug 2021 15:55

Why is there never never an FRC investigation into massive under-reporting errors of profits/assets? Is it coz they never happen? If so, perhaps auditors should simply dispense with such checks and concentrate solely on potential over-reporting of profits/assets.

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By Trethi Teg
27th Aug 2021 07:35

If the facts I have Googled are correct: -

There are 781 EY partners in the UK. A fine of £2.2 million amounts to £2,816 each. Average partners salary £368k. Number of days work to pay fine is 3.

Compare that with the treatment of small practitioners who are found guilty of not responding to an HMRC letter within a month or inadvertantly sticking the stamp on an envelope upside down .

Tells you all you need to know about the regime we have to endure.

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Replying to Trethi Teg:
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By Paul Crowley
27th Aug 2021 11:22

ICAEW is run by the big four for this exact reason

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Jason Croke
By Jason Croke
27th Aug 2021 10:32

Oh look, yet another failing by a Big 4 firm, nothing to see here, move along, business as usual. A £2m fine isn't going to change things, nor personal fines.

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By zebaa
27th Aug 2021 10:33

The point which caught my eye was the £850 million in additional pension liabilities. The problem with DB pensions is that valuations are based significantly on professional opinion and that the sums involved are massive. While there has been a corporate dash to DC pensions there is still a lot of DB liabilities around quietly hidden in ‘notes to the accounts’ with a single line mentioning no worst case figures. Were these worst case figures to be mentioned in accounts I have no doubt that a significant portion of British companies would find themselves insolvent or deep financial trouble. The official view seems to be that time will solve the problem. I hope that’s right, because if it goes sour the whole issue of financial reporting is going to be looked at with very sceptical eyes.

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By Charityguy
27th Aug 2021 11:21

Mark Harvey, who was not a great partner at EY and who left to join a major car sales business then quickly moved on from there. The £70K fine will mean very little to him. Is it tax deductible?

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By Michael C Feltham
27th Aug 2021 11:25

The arrogance and incompetence of the big accountancy firms continues to beggar belief!

Yet these same clowns sit on the CCAB panel and have the arrant audacity to guide Government.

Yet the vast majority of RAs are small partnerships or sole practitioners.

Is it any real wonder that Britain's holistic banking and financial activities are in such an utter mess?

As already stated with clarity by Trethi Teg (above), the penalties levied upon the little firms are wholly disproportionate.

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By Mr J Andrews
31st Aug 2021 09:29

Sounds like Highway Robbery

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By HLB
31st Aug 2021 09:29

What really gets to me is that the big banks recommend clients to go to the big firms even where they can be handled by 'smaller' firms. The vast majority of these smaller firms have never had an audit failure yet the large firms seem to have regular, well publicized, failures so I cannot see the banks logic.

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By AndrewV12
01st Sep 2021 10:46

Extract above
The disciplinary complaints that EY admitted related to audit shortcomings in three areas :

underreporting defined benefit pension scheme obligations by more than £850m
failure to question or interrogate the evidence for provisions for insurance claims totalling £156.8m; and
inadequate investigation and documentation of the risks surrounding an onerous contract provision relating to the East Coast Mainline railway franchise.

That appears to be the trouble with Auditing, depart from box ticking exercises and things get a bit shaky.

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