EY and audit engagement partner, Mark Harvey, have been heavily fined and received a ‘severe reprimand’ from the FRC over the audit of Stagecoach Group plc for the financial year ended 29 April 2017.

EY’s fine was reduced from £3.5 million to £2,205,000. The fine was discounted by 10% for mitigating factors, and by another 30% for admissions and early disposal. Harvey was fined £70,000.

The failings admitted by the Respondents relate to three specific areas of the Audit: (1) defined benefit pension scheme obligations; (2) provisions for insurance claims relating to accidents; and (3) an onerous contract provision relating to the East Coast Mainline railway franchise. 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 most serious deficiencies in audit work concerned the lack of sufficient evaluation and challenge of the work of management 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.

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 judgements made.  

The breaches of Relevant Requirements were not intentional, dishonest, deliberate or reckless.

The Executive Counsel recognises that EY took steps to identify the root cause of the audit failings, which related to only one audit year, and that the firm has undertaken remedial action in order to address the issues identified. It is also acknowledged that the Respondents have 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.”