One of the Big Four, EY, has been issued a financial sanction by the accountancy regulator for failing to comply with a fee cap for Roman Abramovich-owned Russian mining group Evraz.
The Financial Reporting Council (FRC) issued a final settlement decision notice to Ernst & Young (EY) UK in respect of a breach of the FRC’s revised ethical standard 2019, namely exceeding the 70 per cent fee-cap on non-audit services.
The breach relates to the statutory audit of the financial statements of Evraz for the year ended 31 December 2021.
The Abramovich-owned Russian mining group was incorporated in London and listed as a FTSE 100 company.
Evraz has been suspended from the London Stock Exchange since March 2022.
The former Chelsea Football Club owner, who was sanctioned after Russia’s invasion of Ukraine in February 2022 and told to leave the country, owns 30.5 per cent of the company, making him the overall owner.
EY audited Evraz since it was listed in the UK in 2011 until its resignation as auditor in November 2022 following the imposing of new UK Government sanctions against Russia in response to the invasion of Ukraine.
Former Chelsea owner Roman Abramovich. Credit should read: Jed Leicester/PA Wire
However, there is no suggestion by the regulator that EY has in any way failed to comply with its obligations under applicable sanctions laws.
Its issue is with 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 (PIE)
The cap on non-audit work is 70 per cent of the average of the fees paid to the audit firm over the previous three consecutive years.
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 per cent fee cap, but this breach was not intentional or dishonest.
The financial sanction comprises £121,305 in respect of disgorgement of profits earned on fees in excess of the fee-cap; and ii) an additional £200,000 component.
But the additional component has been discounted for admissions and early settlement to £130,000, such that the total financial sanction is £251,305.
EY UK has also paid the costs of FRC’s executive counsel’s investigation.
In addition, the firm needs to publish a statement in the form of a reprimand, as well as prepare and present a root-cause analysis to the FRC.
Claudia Mortimore, deputy executive counsel explained that “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.”
“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,” she added.
While a spokesperson for EY told City AM: “We identified a breach of the non-audit services fee cap in relation to our 2021 audit of Evraz plc, which we self-reported to the FRC, and have fully co-operated throughout the investigation.”
“We are committed to learning from this matter and have since enhanced our internal guidance, training and procedures,” they added,