EY faces a £750,000 fine and costs of £425,000 after a Financial Reporting Council (FRC) disciplinary investigation found the firm failed to meeting required standards in its auditing of European Home Retail and its subsidiaries, including Farepak Food and Gifts Ltd.
EY audit partner Alan Flitcroft was fined £50,000 and reprimanded over his actions during the audit. Farepak ceased trading in October 2006 owing £37m to 120,000 customers that had put money into the club as a way of spreading the cost of Christmas over many months.
The FRC investigation found that EY and Flitcroft failed to obtain sufficient appropriate audit evidence that all material events had been identified and reflected in Farepak's 2005 financial statements and that Flitcroft, in particular, failed to properly consider Farepak's ability to continue as a going concern. The ruling said that the firm and audit partner did not properly consider whether any relevant disclosures were required in the financial statements to give a true and fair view, or make proper enquiries of the directors and examine the appropriate financial information.
In particular EY and Flitcroft failed to identify adequately the liquidity and cash flow problems facing EHR and by extension Farepak, that had arisen since the balance sheet date, principally the absence of headroom in January and February 2006, according to the FRC.
Paul George, FRC executive director of conduct said: 'The FRC is pleased with the outcome of this case, which sends a strong clear reminder to all accountants and accountancy firms that they have a responsibility to carry out their professional work with due skill, care and diligence in the audit of subsidiary entities and obtain corroborative evidence to support management representations.'
In a statement, EY said the settlement reached with the FRC did not allege any 'causative link' between EY and Flitcroft's conduct and Farepak's entry into administration and losses suffered by the savers.
'However, EY regrets that aspects of our 2005 audit fell beneath our usual high standards,' the firm said.
Flitcroft left EY in 2008 to become chief operating officer of Cardiff Football Club, and later finance director for Ascot Racecourse, a position he stepped down from in October.
Details of the formal complaint relating to Ernst & Young and Alan Flitcroft are HERE
Details of the settlement agreement relating to Ernst & Young and Alan Flitcroft are HERE
