FT reported on Wednesday that the King’s EY was hit with a £295,000 fine ($376,309 USD) after the firm surpassed the allowed non-audit billing amount for a Russian steel company called Evraz. The fine was originally more than £321k but the FRC gives firms a discount if they admit to breaking the rules and/or assist in an FRC investigation. “It would not be fair to treat any part of this announcement as constituting or evidencing an investigation into, or findings in respect of the conduct of, any other persons or entities,” said the FRC in its announcement. It was EY that reported the issue to the FRC on October 4, 2021 after it discovered the whoopsie in August of that year.
The FRC explains the rule EY broke:
The Revised Ethical Standard 2019, which reflects the requirements of UK law, imposes restrictions on the amount of non-audit services that an audit firm may provide to a Public Interest Entity. The cap on non-audit work is 70% of the average of the fees paid to the audit firm over the previous three consecutive years. The cap applies at both Network level (i.e. members of the global EY network) and at Firm level (EY UK). EY UK tested the fee ratio at Network level but not at Firm level, and so accepted and carried out non-audit work in breach of the 70% fee cap. This breach was not intentional or dishonest.
EY was the auditor of record for Evraz from the time it was listed on the UK stock exchange in 2011 until late 2022 when the UK government imposed sanctions on Russia due to their invasion of Ukraine.
As for what exactly happened:
In early 2021 EY accepted an engagement by Evraz to carry out non-audit work in connection with a proposed disposal of the Evraz Group’s coal-related interests. These were principally held through a Russian company, PJSC Raspadskaya. It was proposed that this company would demerge from the Evraz Group and that a dividend in kind would be paid as part of the demerger. The proposed disposal was known as Project Gemini.
EY’s non-audit work in connection with Project Gemini related to the provision of working capital reporting, assistance with correspondence with the Financial Conduct Authority (“FCA”), and a comfort letter in connection with the information in the circular that was prepared to support the demerger.
The average of the fees paid to EY UK for its audits of Evraz in the three consecutive financial years prior to it carrying out work on Project Gemini was $400,462. 70% of this figure is $280,323. The total fees for EY UK’s non-audit services on Project Gemini that were subject to the 70% cap amounted to $535,000 and therefore exceeded $280,000 by a significant margin.
For their sins, EY received the following financial and non-financial wrist slaps:
- A financial sanction comprising: i) £121,305 in respect of disgorgement* of profits earned on fees in excess of the fee-cap; and ii) an additional £200,000 component. The additional component has been discounted for admissions and early settlement to £130,000, such that the total financial sanction is £251,305.
*The disgorged sum represents the profits on non-audit work that EY earned from Evraz plc, over and above the fee cap, which it would not have earned had it complied with the Ethical Standard, and which the FRC has now required EY to give up as part of the financial sanction imposed.
Non-financial sanctions as follows:
- A published statement in the form of a reprimand.
- A root-cause analysis report to be prepared and presented to the FRC identifying the reasons for the breach and actions taken since, including in response to the wider issue around EY’s handling of the approval and assessment of non-audit services, identified in the FRC’s 2023 Audit Quality Inspection and Supervision Report.
- Any further remedial action proposed by the FRC to be implemented as necessary.
“The Ethical Standard sets clear limits on the value of non-audit services an auditor can provide. Its aim is to uphold high standards of auditor independence and ensure public confidence in audit,” said Claudia Mortimore, Deputy Executive Counsel at the FRC. “In this instance, EY’s systems and controls failed to ensure compliance with the Ethical Standard which led to the fee-cap being breached. In addition to the financial sanctions announced, EY is required to report to the FRC on the reasons for the breach and to provide assurance that appropriate measures are in place to avoid any future recurrence.”
We’re sure they’re very, very sorry and won’t ever get caught doing do this again.