EY fined £2.2m for Stagecoach audit flawsby
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.
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.
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 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”.