EY audit of NMC ‘was deficient in multiple respects’ says regulator
A draft report by the accountancy regulator to the High Court has concluded that EY’s audit of collapsed NMC “was deficient in multiple respects” and that “these failings are extremely serious.”
The £2.7bn legal case against EY UK kicked off in the High Court this morning, where Alvarez & Marsal, the administrators of NMC Health Plc, hurled allegations against the firm’s audit team.
London-listed health giant NMC Health Plc collapsed in April 2020 after a short-seller named Muddy Waters published a report in December 2019, raising queries about the group’s financial performance and accounts.
EY was the group’s auditor from 31 December 2012 until NMC was placed into administration.
The firm is under investigation by the Financial Reporting Council (FRC), for its role in NMC’s audits. The regulator has not yet published its report on its investigation, and the FRC confirmed to City AM its probe is still ongoing.
However, the claimants, in their 350-page opening written statements, quoted a “detailed and independent Investigation report” by the FRC that “contains a careful and scathing assessment of EY’s conduct of the audit in the same areas that are the subject of complaint in this claim”.
These views relate only to the final (2018) audit, but the claimants alleged that “the preceding audit years were, if anything, even worse”.
The FRC report quoted in this case runs to 563 pages.
However, as outlined in EY’s 402-page defence written opening statement, the FRC is now considering which, if any, of its provisional complaints it still wishes to maintain in the light of EY’s rebuttal in its representations.
The legal team for the Big Four giant pointed out that the report is provisional and does not take into account the “very detailed responses” EY sent back to the regulator.
EY produced ‘fundamentally flawed’ audits
The case will run for 15 weeks as the legal party for the administrators is accusing EY of “unqualified” and “wrong” opinions of each of the NMC audit years.
The claimants’ lead silk, Brick Court’s Simon Salzedo KC, told Dame Clare Moulder this morning that “EY’s errors were so basic and shocking,” accusing the audit team of “fundamentally flawed” work.
The case targets allegations that EY’s audits “fell very far below the standards expected of a reasonably competent auditor.”
NMC was listed on the London Stock Exchange but was headquartered in the United Arab Emirates, meaning the accounts were audited by EY Middle East, a different and independent firm in the EY network.
The failure to access the general ledgers is at the heart of the negligence allegations against EY.
The professional services company denies any negligence and denies owing any duty to uncover the fraud. As outlined in EY’s defence document, its audit of the consolidated group financial statements “properly relied on the work of EY Middle East as auditor of those components pursuant to the relevant professional standard”.
Expensive legal fight
The case will run into October, pausing for the Summer term. Over the next few weeks, the court will hear from a range of witnesses, including several EY auditor partners.
According to the recent administrator’s report, Alvarez & Marsal has received over £12.8m in litigation funding to pay the costs of its claim against EY. The administrators called on US law firm Quinn Emanuel & Sullivan, with lead partners Richard East, Aidan O’Rourke, and Nikolas Bruce-Smith acting for the administrators.
With a quoted £2.7bn on the line if the judge finds in favour of the claimants, EY is fighting this case hard with four senior barristers on its legal line-up, enlisted by its external law firm RPC, led by partner Rupert Boswall.
The barrister, Salzedo KC, did tell the judge that “one would hope a firm like EY would have insurance but there is no suggestion from EY on if they do or not”.
Commenting on the case, an EY UK media statement stated: “This was a complex, pervasive and collusive fraud, and responsibility for it lies squarely with its perpetrators, including NMC’s owners, directors and the treasury and finance team. This case is without merit and the full extent of this unprecedented fraud – of which EY was one of the targets – will be exposed during the course of the trial.”