The U.K. Financial Reporting Council (FRC) announced Monday it has opened an investigation into Ernst and Young’s audit of the 2018 financial statements of NMC Health, a healthcare provider based in the United Arab Emirates that’s currently under investigation for accounting fraud.

The investigation by the FRC’s Enforcement Division began April 15 and concerns the financial statements of NMC Health for the year ended Dec. 31, 2018. NMC’s troubles, and the follow-up investigation into EY’s audit, are the result of a damning report published in December 2019 by Muddy Waters, in which the short-seller stated it was short NMC Health shares and that it had “serious doubts about the company’s financial statements, including its asset values, cash balance, reported profits, and reported debt levels.”

Muddy Waters further alleged NMC “manipulated its balance sheet to understate debt,” citing several reasons as to why it has made those allegations. It also attacked NMC Health for having insufficient governance. “In our view, it falls well short,” Muddy Waters stated. “We do not see the independent board members as being truly independent.”

“The company’s relationship with its auditor, Ernst & Young, raises flags,” Muddy Waters continued. “Executive compensation has nearly tripled in two years to $18.7 million a year, and insiders have monetized material amounts of stock. We are unsure how deep the rot at NMC goes, but we do not believe that its insiders or financials can be trusted.”

NMC Health responds

In response to the report, NMC Health announced on Jan. 17 that it hired former FBI director Louis Freeh to head up an independent committee to review the allegations. On Feb. 26, NMS provided an update to that review, in which it disclosed supply chain financing arrangements were identified that had been in place since early 2018.

“These arrangements were not disclosed to, or approved by, the board and were not disclosed as related party transactions in accordance with the listing rules,” NMC Health said. The arrangements were not reflected on the company’s balance sheet nor reported in the company’s financial statements for the financial year ended Dec. 31, 2018. Additionally, the review identified “potential discrepancies and inconsistencies in the company’s bank statements and ledger entries,” the company said.

In that same announcement, NMC said it granted CFO Prashanth Shenoy “extended sick leave” and removed CEO Prasanth Manghat from his position.

The following day, on Feb. 27, NMC announced the Financial Conduct Authority (FCA) agreed to its request for a “temporary suspension of its shares … to ensure the smooth operation of the market.” That same day, NMC later said it had been notified by the FCA that it had “commenced a formal enforcement investigation,” and that it “will continue to cooperate with the FCA and any and all other relevant authorities.”

On April 9, after failing to reach an agreement with creditors, NMC Health announced the appointment of Alvarez & Marsal as administrators. The High Court of England and Wales made the appointment in response to a petition presented by Abu Dhabi Commercial Bank, one of NMC’s largest creditors.

NMC’s existing board of directors currently has no decision-making powers, which “transfer to the administrators, who are responsible for the day-to-day running of the company,” NMC Health said. As of March, NMC Health warned its estimated debt position stands at $6.6 billion.