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Outcome of disciplinary case against Ernst & Young LLP, Member Firm of the ICAEW and Alan Flitcroft, Member of the ICAEW

PN 112
19 Dec 2013


The Financial Reporting Council (“FRC”) announces the outcome of the disciplinary case against Ernst & Young LLP (“EY”) and Alan Flitcroft, former auditors to European Home Retail plc (“EHR”) and its subsidiaries, including Farepak Food and Gifts Ltd. (“Farepak”).
 
A settlement was agreed between the Executive Counsel to the FRC, Gareth Rees QC, EY and Alan Flitcroft on 12 December 2013. EY and Mr Flitcroft admitted that their conduct fell below the standards reasonably to be expected of ICAEW Members and Member firms in that they failed to comply with requirements of applicable auditing standards and consequently failed to act in accordance with the Fundamental Principle of Performance (as set out in the ICAEW Guide to Professional Ethics) in the following ways:

  1. In relation to Farepak’s FY05 Financial statements, EY and, in particular, Mr Flitcroft failed to perform adequate procedures to obtain sufficient appropriate audit evidence that all material subsequent events up to the date of their audit report which required adjustment of, or disclosure in, the financial statements had been identified and properly reflected therein. EY and Mr Flitcroft failed to obtain sufficient appropriate audit evidence, in relation to subsequent events, to enable them to draw reasonable conclusions on which to base their audit opinion or to consider the effect of the subsequent events on the financial statements and on their audit report. As such they failed to comply with SAS 150 and 400, were in breach of ICAEW Fundamental Principle 4: Performance and their conduct fell below the standard reasonably to be expected of them. 


  2. In relation to a Letter of Representation, dated 8th February 2006, regarding post balance sheet events, EY and, in particular, Mr Flitcroft failed to seek or obtain adequate corroborative evidence for the assertions made in the letter; properly evaluate whether the representations made in the letter appeared reasonable, consistent with the other audit evidence obtained; or properly consider the implications of the lack of evidence for their audit report. As such they failed to comply with the requirements of SAS 440, were in breach of ICAEW Fundamental Principle 4: Performance and their conduct fell below the standard reasonably to be expected of them.


  3. In relation to Farepak’s FY05 Financial Statements, EY and, in particular, Mr Flitcroft failed to properly consider Farepak’s ability to continue as a going concern. In particular, in February 2006, prior to signing the financial statements, they failed to: properly consider Farepak’s ability to continue as a going concern; properly consider whether any relevant disclosures were required in the financial statements to give a true and fair view; make proper enquiries of the directors and examine the appropriate financial information. In particular EY and Mr 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; As such they failed to comply with the requirements of SAS 130, were in breach of ICAEW Fundamental Principle 4: Performance, and their conduct fell below the standard reasonably to be expected of them. 


  4. In relation to the Letter of Representation, dated 8th February 2006, regarding going concern, EY and, in particular, Mr Flitcroft failed to properly seek or obtain corroborative evidence for the assertions made in the letter; properly evaluate whether the representations made in the letter appeared reasonable and consistent with the other audit evidence obtained and; properly consider the implications of the lack of evidence for their audit report. As such they failed to comply with the requirements of SAS 440, were in breach of ICAEW Fundamental Principle 4: Performance, and their conduct fell below the standard reasonably to be expected of them. 

The Tribunal has approved the terms of the settlement, which imposes the following sanctions upon EY and Mr Flitcroft:
 
  • A fine of £750,000 to be paid by EY, adjusted from £850,000 to reflect the admissions made by EY (in accordance with paragraph 57 of the FRC’s Sanctions Guidance);
  • EY to receive a Reprimand;
  • A sum of £425,000 to be paid by EY for the Executive Counsel’s costs of, and incidental to, the investigation and the Formal Complaint;
  • A fine of £50,000 to be paid by Alan Flitcroft, adjusted from £60,000 to reflect the admissions made by Alan Flitcroft (in accordance with paragraph 57 of the FRC’s Sanctions Guidance);
  • Alan Flitcroft to receive a Reprimand.
 
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. The result in this case underlines the FRC’s commitment to promote public confidence and ensure the accountancy profession has proper regard for the technical and professional standards expected of members.”
 
Notes to editors:

  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.


  2. All Press enquiries should be directed to: Peter Timberlake, Head of Communications on telephone: 020 7492 2397/ 07768 502332, or emailp.timberlake@frc.org.uk. Or to Sophie Broom, Communications Executive, on telephone: 020 7492 2395/ 07771 808464 or email: s.broom@frc.org.uk.


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