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The UK accounting watchdog identified “extremely serious” failings in EY’s auditing of NMC Health, a London court heard on Monday, at a trial over the Big Four firm’s work for the FTSE 100 group that collapsed in scandal in 2020.
The regulator’s findings were disclosed in the High Court as the administrators of NMC accused EY of negligence and sought about £2bn from the firm on behalf of creditors who lost money when the hospital operator failed.
The administrators from Alvarez & Marsal claim EY auditors missed a series of “red flags” before NMC collapsed following the disclosure of billions of dollars of hidden debts. The scandal has sparked a litany of legal claims and regulatory investigations spanning London, New York and Abu Dhabi.
EY has denied any negligence in its work signing off NMC’s accounts. In written arguments to the court, the firm argued it had been a “principal target” of a “pervasive” fraud, adding that it had neither a duty nor the ability to uncover such wrongdoing. EY is due to begin its defence on Wednesday, with the trial set to run until October.
The administrators claim that EY failed to check NMC’s general ledger, a key financial register holding transaction records, arguing that doing so would have exposed the alleged fraud.
They also claim that EY did not properly control communication with NMC’s banks, allowing “a large proportion” of financial statements to be manipulated by NMC executives before the firm relied on them to confirm the company’s financial position.
The Financial Reporting Council, which regulates UK auditors, has been running its own probe into EY’s work at Abu Dhabi-based NMC and has yet to announce its conclusions. But details of the regulator’s provisional findings were revealed in court on Monday.
In support of their negligence claim, lawyers for the administrators cited an FRC finding that EY had “failed to perform adequate audit procedures, to bring objectivity to bear, and to exercise professional scepticism” in its work on NMC’s accounts.
The FRC opened its investigation in April 2020 and later issued an initial report privately to EY, which will only be made public after the regulator considers whether to change its findings in light of EY’s rebuttals. The rebuttal process can result in the two sides settling, including the potential agreement for the audit firm to pay a fine.
EY, which was paid £14mn for its audits of NMC from its flotation in 2012 to its eventual collapse, said in written arguments that it “comprehensively challenged” the FRC’s findings.
Lawyers for the administrators quoted from the FRC’s 563-page provisional report, saying the regulator had found that EY had failed to properly question why NMC would not provide it access to the general ledger, and had ignored a “very significant inconsistency” between NMC’s reported debts and a statement provided by one of the company’s creditors, which should have “prompted major investigation”.
The lawyers said the regulator also raised concern in its report about EY’s independence because two EY Middle East employees had remained on the audit beyond the usual time restrictions.
The lawyers added that the FRC had found that one EY partner in the UK had “bowed to the pressure being exerted by [NMC’s] clear threats to terminate the . . . engagement . . . and failed to exercise objectivity from this point”.
The case continues.
