Sanctions against Ernst & Young LLP
News types: Investigations
Published: 7 August 2024
This Press Notice concerns the outcome of an investigation into the relevant Statutory Audit Firm (as defined in the FRC’s Audit Enforcement Procedure). It would not be fair to treat any part of this announcement as constituting or evidencing an investigation into, or findings in respect of the conduct of, any other persons or entities.
The Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice to Ernst & Young LLP (EY UK) under the Audit Enforcement Procedure and imposed sanctions in respect of a breach of the FRC’s Revised Ethical Standard 2019, namely exceeding the 70% fee-cap on non-audit services. The breach relates to the Statutory Audit of the Financial Statements of Evraz plc for the year ended 31 December 2021.
The sanctions are:
- A financial sanction comprising: i) £121,305 in respect of disgorgement* of profits earned on fees in excess of the fee-cap; and ii) an additional £200,000 component. The additional component has been discounted for admissions and early settlement to £130,000, such that the total financial sanction is £251,305.
- Non-financial sanctions as follows:
- A published statement in the form of a reprimand.
- A root-cause analysis report to be prepared and presented to the FRC identifying the reasons for the breach and actions taken since, including in response to the wider issue around EY’s handling of the approval and assessment of non-audit services, identified in the FRC’s 2023 Audit Quality Inspection and Supervision Report.
- Any further remedial action proposed by the FRC to be implemented as necessary.
EY UK has also paid the costs of Executive Counsel’s investigation.
Evraz is a multi-national mining group, headquartered in Moscow but incorporated in London and listed as a FTSE 100 company. Its shares have been suspended from trading on the London Stock Exchange since March 2022. EY UK audited Evraz since it was listed in the UK in 2011 until its resignation as auditor in November 2022 following the imposing of new UK Government sanctions against the Russian Federation in response to the invasion of Ukraine. There is no suggestion that EY has in any way failed to comply with its obligations under applicable sanctions laws.
The Revised Ethical Standard 2019, which reflects the requirements of UK law, imposes restrictions on the amount of non-audit services that an audit firm may provide to a Public Interest Entity. The cap on non-audit work is 70% of the average of the fees paid to the audit firm over the previous three consecutive years. The cap applies at both Network level (i.e. members of the global EY network) and at Firm level (EY UK). EY UK tested the fee ratio at Network level but not at Firm level, and so accepted and carried out non-audit work in breach of the 70% fee cap. This breach was not intentional or dishonest.
Claudia Mortimore, Deputy Executive Counsel, said:
“The Ethical Standard sets clear limits on the value of non-audit services an auditor can provide. Its aim is to uphold high standards of auditor independence and ensure public confidence in audit.
In this instance, EY’s systems and controls failed to ensure compliance with the Ethical Standard which led to the fee-cap being breached.
In addition to the financial sanctions announced, EY is required to report to the FRC on the reasons for the breach and to provide assurance that appropriate measures are in place to avoid any future recurrence.”
*The disgorged sum represents the profits on non-audit work that EY earned from Evraz plc, over and above the fee cap, which it would not have earned had it complied with the Ethical Standard, and which the FRC has now required EY to give up as part of the financial sanction imposed.