EY has been hit with a major fine and one of its former top leaders censured after an investigation found the 'Big Four' auditor's work on London-listed Stagecoach (SGC.L) fell short of standards.
The Financial Reporting Council (FRC), the watchdog for the accounting sector, on Wednesday announced sanctions against EY and Mark Harvey, a former senior partner at EY who oversaw the Stagecoach work.
EY has been fined £3.5m ($4.8m), hit with a "severe reprimand", and told to deliver detailed reports to the FRC about similar work for the next 12 months to ensure it is not repeating mistakes. Harvey has been fined £70,000 and given a "severe reprimand".
The punishments come after an FRC investigation concluded that EY's audit work for Stagecoach, the FTSE 250 (^FTMC)-listed coach and travel group, "did not satisfy the audit reporting requirements" in 2017.
"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," said Claudia Mortimore, deputy executive counsel to the FRC.
"The sanctions imposed reflect the seriousness of the breaches and are intended to improve the quality of future audits."
EY said in a statement: "Audit underpins trust and confidence in the economy and delivering high quality audits is an absolute priority for us. Regrettably, on this occasion, we fell short of the standards we set for ourselves, and the standards expected of us by the FRC and society."
2017 was the first year Stagecoach was audited by EY. The FRC said Stagecoach results were not misstated at any point and mistakes were not repeated in any subsequent years.
The watchdog said EY had cooperated fully with its investigations and since made changes to address the root causes of the audit issues. The breaches were "not intentional, dishonest, deliberate or reckless," the FRC said.
"We have cooperated with the FRC throughout their investigation, take their findings very seriously and have worked hard to rectify the issues identified," EY said. "No findings were raised in the FRC’s review of our most recent audit of the company, for the 2020 year-end."
Harvey has been contacted for comment. He worked at EY for just under 25 years, according to his LinkedIn profile, serving as a partner at the firm for 14 years. He was the firm's senior partner in Scotland but left last July.
The FRC fine adds to EY's auditing woes. In line with the broader accountancy sector, the firm has faced mounting scrutiny over the quality of its auditing work. Critics say 'Big Four' firms have let auditing standards lapse in order to win business at other divisions like consultancy with the firms they are auditing. The 'Big Four' have been ordered to spin-off their auditing divisions by 2024 in response a litany of scandals and failings.
EY has come in form particularly close scrutiny due to its work on collapsed businesses Thomas Cook, London Capital & Finance, and NMC Health. The FRC is investigating EY's work on both Thomas Cook and London Capital & Finance.
"We continue to make significant investments in audit quality across EY and, on 1 July this year, we established a new UK Audit Executive Committee and Audit Remuneration Committee," EY said in a statement. "These will support our focus on delivering the highest levels of audit quality by building a culture of challenge and providing independent oversight of our UK audit practice.
"We remain committed to working with the FRC and other stakeholders to enhance standards across the audit profession, and to ensure the UK’s corporate governance and audit framework remains world leading."