EY to pay £2.2m in penalties over Stagecoach audit

The Financial Reporting Council issued a final decision notice to EY on Wednesday, and imposed sanctions against the big four accounting firm, over the statutory audit of Stagecoach Group 2017 financial year.

The independent regulator handed down a financial sanction of £3.5m, discounted by 10% for mitigating factors and by 30% for admissions and early disposal, to £2.21m.

It also issued a “severe reprimand”, as well as a declaration that the audit report did not satisfy the reporting requirements, and a non-financial sanction requiring EY to report to the FRC for one year in respect of audit work performed in relation to “onerous” contract provisions.

The FRC also issued a financial sanction of £0.1m, discounted for admissions and early disposal by 30% to £70,000, and a “severe reprimand”, to the audit engagement partner Mark Harvey.

It said the failings admitted by the respondents related to three specific areas of the audit, with being defined benefit pension scheme obligations, provisions for insurance claims relating to accidents, and an onerous contract provision relating to the East Coast Main Line railway franchise.

All three areas of the audit concerned material balances, and had been identified by the respondents as areas of significant risk requiring a heightened audit response.

The FRC said the most serious deficiencies in audit work concerned the lack of sufficient evaluation and challenge of the work of management’s and the respondents’ respective experts, and the associated lack of proper challenge of management about material assumptions underlying the financial statements.

While it was not alleged that the financial statements were in fact misstated, in several material instances the respondents failed to obtain sufficient appropriate audit evidence and to apply sufficient professional scepticism in their conduct of the audit.

Additionally, the content and extent of the audit documentation which the respondents were required to prepare was described as being of a “low quality”, which did not record the full extent of the procedures and judgements made.

The regulator said the breaches of relevant requirements were not intentional, dishonest, deliberate or reckless, however.

Its executive counsel said it recognised that EY took steps to identify the root cause of the audit failings, which related to only one audit year, and that the firm had undertaken remedial action in order to address the issues identified.

The FRC also acknowledged that the respondents had provided a “good level” of cooperation during the investigation.

“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 the FRC’s deputy executive counsel Claudia Mortimore.

“The sanctions imposed reflect the seriousness of the breaches and are intended to improve the quality of future audits.”