EY fined over flawed 2017 audit of Stagecoach

Professional services giant EY has become the latest member of the Big Four to be stung with a multi-million pound fine for its accounting work. The company received a £3.5 million slap on the wrist from the UK auditing watchdog for failures over its work for Stagecoach.

Scrutiny has been mounting on the UK’s largest professional services in recent years, following a succession of high-profile liquidations resulting from shoddy accounting work. With this, pressure is also mounting on the industry watchdog to demonstrate it is doing its best to bring the nation’s top auditors to heel, with the Financial Reporting Council (FRC) having previously been labelled a “paper tiger.”

In response to this, the regulator has cracked down with a succession of hefty fines for accounting misdemeanours among the Big Four. Less than one year ago, an independent tribunal ordered Deloitte to pay a £15 million and a further £5.6 million in legal fees, after a massive accounting scandal caused a multi-billion write down of IT company Autonomy, following its sale to Hewlett Packard in 2011. Meanwhile, earlier this year, KPMG was given a £13 million rap over the knuckles for misconduct relating to the administration and sale of bed retailer Silentnight.

Now, EY has become the latest member of the industry’s top-table to be hit with punitive fines. The firm received a £3.5 million fine for its role as auditor of transport company Stagecoach, while the FRC also fined Mark Harvey, EY's auditing engagement partner, £100,000. The fines are for problems in auditing Stagecoach's rail franchise deal for the East Coast Main Line, its pension scheme and insurance provisions.

Failings included provisions for insurance claims relating to accidents, defined-benefit pension scheme obligations and an onerous contract provision relating to the East Coast Main Line railway franchise. In response, EY admitted to failings in specific areas of the Stagecoach audit in 2017, its first for the FTSE 250, tram, coach and bus company. The FRC also said the breaches "were not intentional, dishonest, deliberate or reckless," and as a result, the fines have since been reduced to £2.2 million and £70,000 respectively – with the FRC citing mitigating factors, and EY's admissions.

In a statement, the FRC said, "While it is not alleged that the financial statements were in fact mis-stated, in several material instances the respondents failed to obtain sufficient appropriate audit evidence and to apply sufficient professional scepticism in their conduct… The content and extent of the audit documentation which the respondents were required to prepare was of a low quality which did not record the full extent of the procedures and judgements made."

EY’s fines may have been reduced, but it is also required to demonstrate improvement to the watchdog. EY will be required to report to the FRC for a year in respect of audit work, in relation to onerous contract provisions.

Claudia Mortimore, Deputy Executive Counsel to the FRC, stated, "The sanctions imposed reflect the seriousness of the breaches and are intended to improve the quality of future audits."