Accountancy giant fined £3.5m for Stagecoach audit failings as former boss has knuckles rapped

The Financial Reporting Council (FRC) also fined Mark Harvey, the former head of Scotland at the “big four” accountant, £100,000 in relation to the audit of the Perth-based bus giant’s accounts for the year ended April 29, 2017.

The ruling is likely to thrust the quality of audit work carried out by the UK’s major accountants back into the spotlight, following the publication of the latest audit quality inspection results by the FRC in July. Sir Jon Thompson, chief executive of the FRC, concluded then that “significant change still needs to happen to meaningfully improve audit quality.”

EY said that it had fallen “short of the standards we set for ourselves”.

The FRC said the failings admitted to by EY regarding Stagecoach related to three specific areas, including an onerous contract provision relating to the East Coast rail franchise that the company ran with Virgin Trains from 2014 until it was renationalised in 2018.

Former UK Transport Secretary Chris Grayling brought the franchise back in-house after Stagecoach had reported heavy losses on the operation of the contract.

The FRC said the sanctions imposed on EY over the Stagecoach audit also related to defined pension scheme obligations, and provisions for insurance claims relating to accidents.

“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 FRC said.

The watchdog ruled that the “most serious deficiencies” in the EY audit of Stagecoach “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,” the FRC said.

“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 judgments made.”

But the FRC added: “The breaches of relevant requirements were not intentional, dishonest, deliberate or reckless.”

The FRC said EY had taken steps to identify the causes of the audit failings, which related to one audit year, and has acted to address the issues. It noted that EY had “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 fines imposed on EY was reduced to £2.2m, having been cut by 10 per cent for mitigating factors, and discounted by 30% for admissions and early disposal. Mr Harvey, who also received a severe reprimand, saw his fine cut by 30% to £70,000 for admissions and early disposal. He left EY to become chief financial officer at Arnold Clark last summer, and has been replaced by Ally Scott.

EY said in a statement: “Audit underpins trust and confidence in the economy and delivering high quality audits is an absolute priority for us. Regrettably, on this occasion, we fell short of the standards we set for ourselves, and the standards expected of us by the FRC and society.

“We have cooperated with the FRC throughout their investigation, take their findings very seriously and have worked hard to rectify the issues identified. No findings were raised in the FRC’s review of our most recent audit of the company, for the 2020 year-end. We continue to make significant investments in audit quality across EY and, on 1 July this year, we established a new UK audit executive committee and audit remuneration committee. These will support our focus on delivering the highest levels of audit quality by building a culture of challenge and providing independent oversight of our UK audit practice.”

“We remain committed to working with the FRC and other stakeholders to enhance standards across the audit profession, and to ensure the UK’s corporate governance and audit framework remains world leading.”