EY missed a chance to spot fraud promptly at collapsed hospital administrator NMC Health because it failed for seven years to access a key financial register, according to a $2.7bn legal claim brought by administrators.
A skeleton argument prepared for a procedural hearing at London’s High Court on Friday said the auditor would have “quickly” identified the alleged fraud that led to NMC’s collapse if it had secured access to the company’s general ledger. Inspecting the general ledger — a record of all a company’s financial transactions — is regarded as a basic yet critical task in an independent audit.
The document also claimed the Big Four firm placed the NMC audit under “close monitoring status” as early as 2015 and escalated it to a separate internal “worry list” by 2018. Despite these alleged concerns, EY gave unqualified audit opinions over NMC’s accounts from its listing in 2012 until its final set of figures signed in 2019.
EY’s UK business has denied that it was negligent in its audits of NMC. When asked about the points raised in the administrator’s skeleton argument on Friday, EY said: “We will continue to defend the claim vigorously.”
NMC, an Abu Dhabi-based hospital operator, fell into administration in April 2020 after discovering that more than $4bn of debt was hidden from its balance sheet in one of the biggest alleged frauds at a London-listed company. Administrators Alvarez & Marsal have been tasked with securing funds to repay NMC’s creditors. They are seeking up to $2.7bn in damages.
The argument marks the first time anyone has claimed EY failed for such a long period to carry out such a standard part of the audit process at NMC.
The skeleton argument referred to evidence from the administrator’s audit expert witness, Jimmy Daboo, a former KPMG partner.
The document said: “It appears that EY failed, for seven years, to obtain access to the general ledger of NMC.”
It added: “Had EY done so, [it] would have quickly led to the identification of fraudulent activity because the fraudulent transactions at issue in this case were recorded in the general ledger.”
EY also allegedly failed to control the process of confirming bank account and lending balances and instead allowed NMC employees to intervene in communications with the banks, according to the court documents.
As a result, EY did not identify billions of dollars’ worth of debts recorded in NMC’s general ledger but not disclosed in NMC’s published financial statements, the administrators claimed.
The High Court allegations come on top of several earlier claims about the shortcomings of EY’s audits of NMC. The administrator previously claimed that the Big Four firm failed to verify NMC’s bank and debt balances — claims similar to those against EY over its audits of collapsed German payments company Wirecard.
Meanwhile, the administrators also claimed that EY had a “practice of escalating serious concerns about the audits” to Hywel Ball, the firm’s then head of audit and current managing partner. They did not make any allegations of wrongdoing against Ball.
Ball, who is preparing to retire from the firm, was alerted in 2018 that NMC was on EY’s audit quality support team’s “worry list”, according to the documents. Ball was on the firm’s “close monitoring board” in 2015 when the NMC audit was elevated to “close monitoring status”, the documents also claimed.
A person familiar with EY’s procedures said it was standard practice for an audit with a higher risk profile to be flagged to the firm’s head of audit, to ensure that teams had sufficient support.
Following a report by short seller Muddy Waters in late 2019 questioning the company’s finances, Ball was “directly involved” in EY’s response to the NMC situation, the administrators claimed.
A trial is set to take place between April and October next year. However, EY is seeking an adjournment until 2026.
The audit firm is under a separate investigation by the UK accounting regulator over its work at NMC.
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