Ernst & Young LLP (EY) has been fined £3.5m and received a severe reprimand from the Financial Reporting Council (FRC) after it ruled that there were failings in the firm’s audit of Stagecoach.

A statement from the FRC said they had reduced the accounting firm’s fine to just over £2.2m in recognition of the firm conceding that there were failings, although EY will also be required to report to the about audit work performed in relation to onerous contract provisions for a period of 12 months.

Meanwhile, EY audit engagement partner, Mark Harvey, received a financial sanction of £100,000 and a severe reprimand from the FRC, although his fine was reduced to £70,000 for admitting shortcomings.

Both parties admitted failings in EY’s audit of Stagecoach’s relating to three specific areas, with these being the transport provider’s defined benefit pension scheme, provisions for insurance claims and onerous contract provision.

FRC said the most serious deficiencies 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.

As such, the respondents were deemed to have failed to obtain sufficient appropriate audit evidence and to apply sufficient professional scepticism over the course of the audit, although their behaviour was not determined to be “intentional, dishonest, deliberate or reckless”.

FRC deputy executive counsel, Claudia Mortimore, 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."

FRC also acknowledged that the firm had taken steps to identify the root cause of the audit failings and that the firm has undertaken remedial action in order to address the issues identified, while it also stated that the respondents provided a good level of cooperation during the investigation.

An EY spokesperson commented: "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.”

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