Please ensure Javascript is enabled for purposes of website accessibility
November 30, 2022

EY Reminds Us That Audits Provide ‘Reasonable Assurance,’ Not a Guarantee That Billions of Dollars Aren’t Hidden From the Balance Sheet

a lazy auditor

The NMC Health collapse of 2020 is still haunting EY UK, this time in London High Court as NMC administrators accuse the firm of failing in their duties and not noticing “one of the biggest frauds ever alleged at a FTSE 100 company.” The administrators, whose job it is to find some funds to repay NMC creditors, say EY auditors did not detect that NMC’s accounts were fraudulently misstated to the tune of a couple billion dollars. EY says that wasn’t their job.

FT reports:

Auditors have long complained of an “expectation gap” between the public perception of their role and their actual duties.

In its defence filed this month, EY said audits were designed to give “reasonable assurance” the accounts were not materially misstated but they do not guarantee this and do not absolve company directors of “primary responsibility for the accuracy of those financial statements”.
The firm said the alleged fraud “involved the falsification and concealment of accounting records and other documents”.

Reading that I am immediately transported back to the days when I worked for CPA review and sat through hours upon hours of live class. “Whose statements are these?” “MANAGEMENT’S!” Moving on…

It added it was “not aware that there were a large number of payments to and from Dr Shetty’s personal bank accounts” and denied it should have taken steps that would have revealed manipulated entries.

Dr. Shetty is NMC’s founder and he has his own, separate but related legal problems. The administrators say that $1.5 billion was transferred to Shetty and two of his associates, something EY would have noticed had the firm properly verified NMC’s bank and debt balances. The accusations are eerily similar to what happened with EY’s work on German fintech company Wirecard.

In its defense, EY UK also says that if fraud was missed it wasn’t their fault because EY Middle East was performing the work.

It said “many of those charged with governance within NMC, including at the most senior levels, were themselves guilty of perpetrating the fraud (including by making deliberately false representations to EY)”.

The firm’s defence also rests on its outsourcing of much of the NMC audit to its Middle East business. EY UK, which signed off NMC’s group accounts and is the defendant in the legal case, argued it should not be liable for any failings in so-called component audits of overseas operations. EY did not admit any failings by its Middle East business.

EY UK said it carried out its duties as group auditor by giving “proper instructions” to overseas auditors, primarily EY Middle East, and satisfying itself that it could rely on their work. The firm said it had “no reason to think” EY Middle East was not carrying out its work properly.

EY charged NMC $14 million for audit work performed over a period of about seven years.

Related:
NMC administrators sue EY in UK for alleged audit negligence [Reuters]

Latest Accounting Jobs--Apply Now:

Have something to add to this story? Give us a shout by email, Twitter, or text/call the tipline at 202-505-8885. As always, all tips are anonymous.

3 Comments

  1. This is absurd.
    45 years ago, the then Big Eight should have been told by the “authorities”: you are responsible for the work of your affiliates.

Comments are closed.

Related articles

concept photo of a KPMG auditor searching for material misstatements

Carillion Liquidators Roast KPMG: “A Competent Auditor Would Have Detected the Misstatements”

The Carillion failure is still working its way through the courts and now KPMG is accused by Carillion’s liquidators of missing multiple red flags, the likes of which should not have been missed had KPMG had any clue what it is doing. So say the liquidators. WSJ: KPMG received £29 million from Carillion without qualifying […]

a woman in a business suit with $100 bills in her hand

Here Is a Massive List of Accounting Salaries Broken Down By City

Came across this list from Smartest Dollar of “the best-paying American cities for accountants in 2022” on the Googs and thought it worth sharing because getting paid is the only reason many of you do this job. Before the salary data appears at that link there are several paragraphs about the Inflation Reduction Act that […]