The U.K.’s accounting watchdog Wednesday ordered Ernst & Young to pay a reduced penalty of £2.2 million (U.S. $3 million) related to its audits of international transport company Stagecoach Group for the 2017 financial year. A former EY audit engagement partner was also fined.
The Financial Reporting Council (FRC) reduced an initial £3.5 million (U.S. $4.8 million) penalty in the case as a result of admissions and other mitigating factors. EY was also served a “severe reprimand” and will be required to report to the FRC for one year concerning “a number of audits (to be specified by the FRC), providing details of the audit work performed by EY in relation to onerous contract provisions,” according to the final decision notice.
The FRC said the failings related to three specific areas of the audit: defined benefit pension scheme obligations, provisions for insurance claims relating to accidents, and an onerous contract provision relating to the East Coast Mainline railway franchise. Each concerned material balances and had been identified by EY and engagement partner Mark Harvey as “areas of significant risk requiring a heightened audit response,” the FRC stated.
The regulator said the breaches “were not intentional, dishonest, deliberate or reckless.” Further, it was recognized that EY “took steps to identify the root cause of the audit failings, which related to only one audit year, and that the firm has undertaken remedial action to address the issues identified.” EY was also lauded for cooperation provided.
FRC Deputy Executive Counsel Claudia Mortimore 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 skepticism 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,” Mortimore added. The FRC did not allege the financial statements were misstated.
Harvey, who was managing partner of EY Scotland between 2015 and 2019 and who signed the audit report on behalf of EY, was fined £70,000 (U.S. $96,000) and issued a severe reprimand.