Sanctions against Ernst & Young LLP and Mark Harvey
News types: Investigations, Policies and Responsibilities, Publications, Statements
Published: 25 August 2021
The Financial Reporting Council has issued a Final Decision Notice under the Audit Enforcement Procedure and imposed sanctions against Ernst & Young LLP (“EY”) and the Audit Engagement Partner, Mark Harvey (the “Respondents”), in relation to the statutory audit of the consolidated financial statements of Stagecoach Group plc (“Stagecoach”) for the financial year ended 29 April 2017 (the “Audit”).
The following sanctions have been imposed against EY:
- A financial sanction of £3,500,000 (discounted by 10% for mitigating factors and discounted for admissions and early disposal by 30% to £2,205,000).
- A severe reprimand;
- A declaration that the Audit report did not satisfy the audit reporting requirements for the reasons set out in the Final Decision Notice; and
- A non-financial sanction requiring EY to report to the FRC for the period of one year in respect of audit work performed in relation to onerous contract provisions.
The following sanctions have been imposed against Mr Harvey:
- A financial sanction of £100,000 (discounted for admissions and early disposal by 30% to £70,000); and
- A severe reprimand.
At all material times Stagecoach was a FTSE 250 international transport company, which operated buses, trains, trams and express coaches. 2017 was the first year that EY audited Stagecoach.
The failings admitted by the Respondents relate to three specific areas of the Audit: (1) defined benefit pension scheme obligations; (2) provisions for insurance claims relating to accidents; and (3) an onerous contract provision relating to the East Coast Mainline 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 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. Whilst it is 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.
Further, 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.
The breaches of Relevant Requirements were not intentional, dishonest, deliberate or reckless.
The Executive Counsel recognises 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 in order to address the issues identified. It is also acknowledged that the Respondents have provided a good level of cooperation during the investigation.
Claudia Mortimore, Deputy Executive Counsel to the FRC 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 scepticism 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 .”
The Final Decision Notice is available here. This version of the final decision notice was updated on 21 September 2021 to correct a small number of minor errors.