EY accused of misleading watchdog over NMC Health audit
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EY has been accused of misleading the UK’s accounting watchdog over its audit of NMC Health, as a £2bn trial into alleged negligence by the Big Four firm reaches its closing stages.
The FTSE 100 hospital operator collapsed in 2020 following the disclosure of billions of dollars of hidden debts. In a case that began in May, NMC’s administrators from Alvarez & Marsal have accused EY of negligence, claiming its auditors missed a series of “red flags”, and are seeking damages of about £2bn on behalf of NMC creditors who lost money.
The Financial Reporting Council is still conducting a probe into EY’s work for the hospital group, but has not investigated the year that NMC administrators allege it was misled.
NMC administrators said in the High Court on Monday that EY partners had led the regulator to believe that its auditors could access key documents — a complete list of the risky transactions on NMC’s accounting system — when they could only view them on a device controlled by NMC staff.
A partner who led EY’s audit work on NMC for three years acknowledged during the trial that what EY told the FRC had been “incorrect and misleading”, lawyers for the administrators told the court. The administrators accepted that EY’s actions that misled the regulator could have been inadvertent.
Viewing the complete list of financial transactions is a crucial part of the audit process. NMC staff had given EY auditors various excuses for being unable to provide the full download of journal entries, according to the administrators.
However, a 2018 email from another of EY’s lead auditors revealed that he was “not sure (whether to) believe their so-called technical barriers”, cited in the administrators’ closing submissions. According to the closing submissions, that lead auditor also told the court that EY staff internally described NMC as the UK’s “number one red label audit”.
The scandal has sparked a catalogue of legal claims and regulatory investigations spanning London, New York and Abu Dhabi.
EY’s failure to view all the transactions or to secure access to NMC’s general ledger — a record of all its financial transactions — has been a key part of the administrators’ claim against the Big Four firm. They also allege that EY did not properly control communication with NMC’s banks, allowing “a large proportion” of financial statements to be manipulated by company executives.
EY, which was paid £14mn for its audits of NMC, has denied any negligence in its work signing off NMC’s accounts and is due to present its closing arguments in the case this week.
The accounting firm has argued during the trial that auditors should not bear the financial responsibility for “concealed” fraud involving 80 NMC staff, who EY said had circumvented the audit process and led to the company’s collapse — or if the administrators failed to examine other “obvious” avenues such as pursuing NMC staff.
