Recently, the FRC sanctioned leading accountancy firm, EY, and its former auditing engagement partner, Mark Harvey ("Mr Harvey") for failings in the firm's audit of a major transport company ("the company").
The FRC found that EY “failed to obtain sufficient appropriate audit evidence and to apply sufficient professional scepticism” in relation to a variety of aspects of its audit.
The Final Decision Notice can be found here.
The findings of the FRC
EY audited the company for the first time in the financial year to 29 April 2017 ("FY2017").
The FRC held that there had been failures in three areas of the audit, concluding that the audit had "failed in its principal objective" of providing assurance that the company's Financial Statements were free from material misstatement.
The FRC concluded that breaches of Relevant Requirements (i.e. those requirements applying to auditors) occurred in "multiple areas of the audit process". The FRC observed that, in certain cases, the breaches were of a "basic and/or fundamental nature" which evidenced a "serious lack of competence in conducting the audit work".
Sanctions
The Final Decision Notice records that, since the audit in FY2017, EY had:
- conducted a root cause analysis to identify how the breaches of Relevant Requirements had occurred; and,
- agreed with the FRC to take certain remedial steps in response to the audit deficiencies identified.
The remedial actions were implemented in respect of the subsequent audit of the company in the next financial year.
EY and Mr Harvey had also cooperated with FRC's investigation processes.
The FRC stated that it would have imposed a fine of £3.5 million on EY, but adjusting for mitigating factors and early disposal, discounted to £2.205 million. It also severely reprimanded EY, declared that the audit in question had not satisfied the Relevant Requirements, and imposed a requirement upon EY to report to the FRC on audit work in relation to onerous contract provisions in the future.
The FRC also imposed a reprimand and fine on Mr Harvey. Mr Harvey's fine was also adjusted to take account of aggravating and mitigating factors and discounted for early admissions and early disposal, to a final amount of £70,000.
EY and Mr Harvey were also ordered to pay the FRC's costs, of nearly £600,000.
Comment
EY is not alone in facing the scrutiny of the FRC in respect of its audit processes. Both Deloitte and KPMG have faced fines of their own in respect of audit failures in the last year. Auditors outside of the "Big Four" have also been the subject of criticism and financial penalties.
The case underscores the value placed by the FRC on cooperation on the part of investigated entities, with both EY's and Mr Harvey's financial penalties reduced to reflect this. It also highlights that, where it considers appropriate, the FRC will be prepared to exercise ongoing oversight of particular areas in respect of a firm it has sanctioned.
Brodies is well placed to assist corporates and individuals on regulatory compliance in the financial services field. For more information, please contact Paul Marshall or James Millward or your usual Brodies contact.
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