EY has been fined £3.5m and given a “severe reprimand” by the Financial Reporting Council, in part for failing to meet requirements when auditing Stagecoach’s defined benefit schemes.
The FRC identified additional failures with respect to “provisions for insurance claims relating to accidents”, and an “onerous contract provision relating to the East Coast Mainline railway franchise”.
Former EY audit engagement partner and Scotland senior partner Mark Harvey, who has since left the company, was also fined £100,000, though both were discounted by 30 per cent because of admissions and early disposal.
The fault occurred in June 2017 when Harvey signed the Stagecoach audit report on behalf of EY, which was then in its first year of auditing the company.
The audit encompassed DB pension obligations of £4.3bn and three separate DB schemes: the Stagecoach Group Pension Scheme, which accounted for 39 per cent of the total obligation; Railways Pension Scheme, 53 per cent, and the Local Government Pension Scheme, 8 per cent.
But the audit failed no fewer than nine International Standard on Auditing regulations, with the FRC’s report into the matter identifying six adverse findings in relation to the audit of the DB scheme obligations.
These covered audit planning, the testing of source data, evaluation/challenging of the auditor’s expert, communication with those in charge of scheme governance, financial statements disclosures, and audit documentation.
With respect to audit planning, the FRC found EY and Harvey had breached four Isa regulations.
They did not perform “sufficient audit work” to understand and evaluate how Stagecoach's management made its pension accounting estimates, or the member data on which it was based.
They also failed to properly interrogate the pension valuation model used, and to implement controls that regulations required be put in place given the “significant risk” involved.
On the testing of source data, the FRC found: “The respondents [EY and Harvey] failed to design and perform audit procedures that were appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence in relation to all material populations and all pension schemes.”
EY and Harvey had failed to complete the work needed to “achieve the necessary audit confidence over whether the source data was complete and valid”, the FRC said, and had made no attempt to design “alternative procedures to deal with the fact that source data was not maintained by Stagecoach for the LGPS and RPS pension schemes”.
They also failed to test the source data.
EY and Harvey did not properly challenge the work of the auditor’s expert, as well as “the assumptions used by management in the calculation of the accounting estimate that gave rise to a significant risk of estimation uncertainty”.
Their failure to apply proper scrutiny to the expert’s opinion meant they did not identify “contradictory statements” regarding the basis for calculating the relevant rate of inflation, or the inconsistency between the expert’s report and the audit team’s work paper “as regards the methodology for 'pension increases in payment' and 'pension increases in deferment”, the FRC said.