EY feels the heat in £2.7bn legal claim over audits

So what? Hywel Ball stood down last month and has no personal role in the case concerned, but he’s watching carefully. The Big Four firm he has chaired for the past five years is facing a £2.7bn legal claim that it oversaw a “fundamentally flawed” audit of a FTSE 100 company.

NMC Health, a private healthcare firm listed in London but headquartered in the UAE, collapsed in scandal in 2020 after a short-seller questioned its accounting. A subsequent investigation by the Financial Conduct Authority found it had understated its debts by as much as $4bn.

In an added twist, EY’s lawyers last week claimed that Sheikh Mansour, the deputy prime minister of the UAE and owner of Manchester City, was “effectively a shadow owner”.

Now the firm’s administrator, Alvarez & Marsal, are pursuing a case on behalf of creditors, which alleges that EY missed a series of “red flags” by not checking NMC’s general ledger, a key financial register of transaction records; failing to control communication with NMC’s banks, allowing financial statements to be manipulated by NMC executives; and allowing two EY Middle East (EY Mena) employees to remain on the audit beyond usual time frames, raising concerns about the firm’s independence.

EY denies any negligence. Indeed, the firm argues it has been a “target” of a “complex, pervasive and collusive fraud” carried out by NMC’s owners, directors and the treasury and finance team. In its opening statement to the court, EY claimed that NMC employees had faked emails, forged letters and masqueraded as bank employees after rehearsing their roles on WhatsApp. It said NMC’s connection to Sheikh Mansour, although “well-understood in the region”, was never drawn to EY’s attention.

Networking event. Instrumental to EY’s case is that the alleged failings were carried out at the “component” rather than “network” level and that the EY global group complied with its oversight duty and should not be held liable for the actions of its Abu Dhabi branch. It has gone as far as describing the former head of its own branch as “plainly a fraudster”. “Money and personnel flow through these structures freely. They’re seconded from office to office or firm to firm,” says Carson Block of Muddy Waters, the short-selling firm that catalysed the collapse of NMC. “But when something fucks up, they [global audit firms] are like, oh, no, that’s not us.”

Revolving doors. Block told The Observer he had spoken with a former NMC board member who said NMC had requested a change of audit engagement partner because management felt that they had been “too formalistic and too rigorous”, and that EY obliged. EY did not comment specifically on this point.

Big deal? The case being prosecuted against EY is unprecedented not least because it relies on evidence of a draft report by the accounting regulator, the FRC, which said the audit was “deficient in multiple respects”.

Let bygones be EYgones. Ball’s attendance shows just how seriously EY is taking the matter. The NMC case follows other actions by the FRC against EY in the last few months including: A £4.9m fine for “serious breaches of standards” in its audits of Thomas Cook; and the launch of a formal investigation into audits of the Post Office between 2015 and 2018.

What’s more… The court battle is set to last 15 weeks and due to the summer term will conclude in October. By then it’s likely Ball’s successor will be in post.

Photo by Ahmad Al-Rubaye/AFP via Getty