FRC fines EY £3.5m for Stagecoach Group audit

Mark Harvey

The Financial Reporting Council (FRC) has announced sanctions against Big Four accountancy firm EY and audit engagement partner Mark Harvey in relation to the statutory audit of the consolidated financial statements of bus company Stagecoach Group plc.

The sanctions concern the audit conducted by the firm for the financial year ended 29 April 2017.

EY has been fined £3,500,000 and has been severely reprimanded by the accountancy regulator.

The FRC has declared that the firm’s audit report did not satisfy the audit reporting requirements for the reasons set out in the Final Decision Notice.

EY must also report to the FRC for the period of one year in respect of audit work performed in relation to onerous contract provisions.

Mr Harvey has been fined £100,000 for his involvement in the audit.

EY first audited Stagecoach in 2017. 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 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 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.”

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