EY’s UK business has denied it was negligent in its audits of NMC Health, the collapsed former FTSE 100 hospital operator, in a $2.7bn court battle that will renew focus on the scope of auditors’ duty to detect fraud.
Abu Dhabi-based NMC entered administration in April 2020 after it was targeted by short sellers in 2019 and the subsequent discovery of $4bn of debt that had been hidden from its balance sheet. The case is one of the biggest frauds ever alleged at a FTSE 100 company.
The legal claim, filed in London’s High Court by NMC’s administrators in May, alleged a string of shortcomings by EY, including a failure to spot that its client’s accounts were fraudulently misstated and that NMC did not keep proper accounting records.
The claim also alleged that the Big Four auditor failed to verify NMC’s bank and debt balances, similar to claims against EY in its role as auditor of collapsed German company Wirecard.
Administrators Alvarez & Marsal, tasked with securing funds to repay NMC’s creditors, claimed that more than $1.5bn was transferred from the group to its founder BR Shetty and two of his associates.
Shetty, himself the subject of a criminal complaint in the UAE, has claimed he was a victim of the fraud.
The case, which is not expected to reach a full trial until 2024, is the latest flashpoint in the debate over an auditors’ duty to spot fraud after UK regulators toughened requirements last year.
Auditors have long complained of an “expectation gap” between the public perception of their role and their actual duties.
In its defence filed this month, EY said audits were designed to give “reasonable assurance” the accounts were not materially misstated but they do not guarantee this and do not absolve company directors of “primary responsibility for the accuracy of those financial statements”.
The firm said the alleged fraud “involved the falsification and concealment of accounting records and other documents”.
It added it was “not aware that there were a large number of payments to and from Dr Shetty’s personal bank accounts” and denied it should have taken steps that would have revealed manipulated entries.
EY argued the amount of damages it was ordered to pay to the administrators should be reduced to reflect NMC’s negligence. It said “many of those charged with governance within NMC, including at the most senior levels, were themselves guilty of perpetrating the fraud (including by making deliberately false representations to EY)”.
The firm’s defence also rests on its outsourcing of much of the NMC audit to its Middle East business. EY UK, which signed off NMC’s group accounts and is the defendant in the legal case, argued it should not be liable for any failings in so-called component audits of overseas operations. EY did not admit any failings by its Middle East business.
EY UK said it carried out its duties as group auditor by giving “proper instructions” to overseas auditors, primarily EY Middle East, and satisfying itself that it could rely on their work. The firm said it had “no reason to think” EY Middle East was not carrying out its work properly.
EY is a network of separately owned national and regional practices that share a brand globally, in a similar way to its rivals, a structure that has helped firms to limit legal liabilities in one country from hitting their finances elsewhere.
EY, which charged almost £14mn for its work since NMC floated in 2012, said most of the administrators’ claims were invalid because of contractual and statutory limitation periods.