EY fined £3.5m for failures over 2017 Stagecoach audit

Big Four accountant EY has been fined £3.5m by a watchdog for failures over its audit of transport firm Stagecoach.

The Financial Reporting Council also fined Mark Harvey, EY's auditing engagement partner, £100,000.

The fines are for problems in auditing Stagecoach's rail franchise deal for the East Coast Main Line, its pension scheme and insurance provisions.

However, the FRC said the breaches "were not intentional, dishonest, deliberate or reckless".

The accountancy firm admitted to failings in specific areas of the Stagecoach audit in 2017, its first for the FTSE 250, tram, coach and bus company.

The company no longer owns the East Coast Main Line franchise.

Failings included provisions for insurance claims relating to accidents, defined-benefit pension scheme obligations and an onerous contract provision relating to the East Coast Main Line railway franchise, the FRC said.

"Whilst it is not alleged that the financial statements were in fact mis-stated, in several material instances the respondents failed to obtain sufficient appropriate audit evidence and to apply sufficient professional scepticism in their conduct," the regulator said.

It added: "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 fines were reduced to £2.2m and £70,000 respectively, because of mitigating factors and EY's admissions.

But EY will be required to report to the watchdog for a year in respect of audit work in relation to onerous contract provisions.

"The sanctions imposed reflect the seriousness of the breaches and are intended to improve the quality of future audits," said Claudia Mortimore, deputy executive counsel to the FRC.

EY said it regrettably fell short of the standards it set for itself, adding that no findings were raised in the FRC's review of the auditor's most recent audit of Stagecoach for the year-end 2020.

It said it had continued to make significant investments in audit quality.

"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," it said.

Last year the FRC told the UK's biggest accountancy firms - KPMG, EY, PwC and Deloitte - that they must ring-fence their audit arms from their consultancy units by 2024.

That followed widespread criticism of the auditors after the collapse of several high-profile companies that had been approved by auditors, such as government contractor Carillion and holiday company Thomas Cook.