EY Slammed with Fine for Audit of Scottish Water Company

Serial Regulatory Breaches

One of the Big Four accountancy firms, EY, has been fined £500,000 (discounted to £325,000) by the Financial Reporting Council (FRC) for its audit of Stirling Water Seafield Finance, a Scottish water company owned by French utilities group Veolia. The FRC launched its inquiry in January 2023 and revealed on Monday that EY and partner Christopher Voogd breached the ten-year limit for auditing a public interest entity. The firm exceeded the limiting maximum ten-year engagement period without an authorizing public tender, a clear contravention of supervisory rules.

This fine comes hot on the heels of the FRC's £6.5 million (reduced to more than £4.8 million) on Richard Wilson of EY and the failed airline Thomas Cook for auditing. The repeat non-compliance is an example of the failure of regulatory standards in EY, pointing to the firm's adherence to ethical practices and quality control standards.

EY's consistent regulatory breaches, the latest Stirling Water Seafield Finance audit fine and the £6.5 million Thomas Cook audit fine being excellent examples, are evidence of a concerning trend of disregard. The breaches demonstrate that EY has systemic issues adhering to ethical code and regulations, which could result in the erosion of investor and client trust. Sanctions by the FRC serve as a stern warning and reminder to uphold auditor independence and transparency.

Ethics and Quality Control Failures

The FRC stated that both EY and Voogd "did not ensure that proper procedures regarding the continuance of the audit engagement had been followed." EY also failed to comply with its quality control standards on independence requirements. EY found and reported the ethical breach to the FRC in November 2021, which indicates an effort to resolve the issue. But the fact that such breaches happened at all indicates some serious inadequacies in the company's internal monitoring and controls.

FRC deputy executive counsel Jamie Symington emphasized the importance of statutory rotation of firms and stated, "Mandatory firm rotation is a clear requirement on auditors reinforced by company law and the FRC's new ethical standard. It is a fundamental legal safeguard to ensure that auditors are persuasively independent, enabling trust and confidence in UK audit and corporate reporting." FRC's choice of action makes evident how independence has the essential role to enable financial report integrity.

The FRC ruling on EY's failure to stick to proper procedures and quality control standards in regard to independence requirements indicates the necessity of possessing effective internal controls. Reporting the breach voluntarily by EY in November 2021 is a positive step, but the occurrence of such incidences indicates a necessity for more stringent oversight and compliance measures. The rotation requirements of the firm are intended to ensure auditor independence, which is required to maintain the integrity of audit practices and financial reporting.

Impact and Future Outlook

Recurring regulatory breaches by EY have far-reaching implications for its future business and reputation. The imposition of fines, along with the necessity to implement new monitoring procedures and processes, suggests that systemic changes must be embraced by the firm. An EY spokesperson stated, "We detected a failure of the rules on firm rotation where necessary in our 2019 audit of Stirling Water Seafield Finance plc, which we reported to the FRC. We have fully co-operated with the FRC throughout the investigation and have implemented new monitoring procedures and processes."

The sanctions history and penalties over the past few years show that EY must act decisively and quickly to win back trust and compliance. It is not just required to deal with the specific issues revealed by the FRC, but it should also conduct an across-the-board review of its audit controls and procedures. The ability of the firm to overcome these issues will be crucial to its remaining a leading accountancy and advisory firm.

The regulatory actions and fines have serious implications for EY's future and reputation. Implementing new monitoring procedures and processes is a step in the right direction, but EY must conduct a broader review of its audit practices to prevent future violations. The company's ability to handle these issues fully and transparently will be crucial to restoring trust and remaining at the top of its game as an accounting and advisory firm. Investors and clients will be watching EY's response and how productive the new compliance policies are.