EY accused of missing ‘red flag’ in NMC collapse
Big Four firm EY UK was accused of being “grossly negligent” and failing in its most fundamental audit duties over seven years, allowing a massive fraud to continue and ultimately causing NMC’s financial collapse.
The mammoth £2.7bn legal battle between EY and its former clients, a London-listed health giant that collapsed after allegations of fraud, began its closing arguments at the High Court this week.
The administrators of private hospital operator NMC Health Plc accused EY of issuing seven consecutive, fundamentally flawed and “unqualified” audit opinions from 2012 to 2018.
In their 754-page written closing arguments, the claimants allege that, despite multiple failures described as “basic and shocking,” EY fell “very far below the standards expected of a reasonably competent auditor.”
The audit giant was accused of failing to detect or address critical “red flags” and significant financial irregularities, including billions of dollars in undisclosed debt and guarantees.
Private hospital operator NMC Health Plc collapsed in April 2020 with debts of as much as $4bn (£3bn), after billions in hidden costs were uncovered. The formerly listed group was accused of misleading the market about its debt, operating with dual accounting records, and failing to declare related-party transactions.
The administrators at Alvarez & Marsal turned to the group’s auditor, EY, seeking to recover losses for investors, who blamed the audit giant for its alleged failings.
EY accused of misleading regulator
The claimants accused EY of misleading the accounting watchdog over its audits of NMC Health.
The administrator accused EY of misleading the regulator into believing it had full access to key financial records, specifically a complete list of transaction-level data and manual journal entries from NMC’s accounting system, when in fact it did not.
“This allegation was denied in EY’s pleading, and was refuted (or at least not admitted) in its factual and expert evidence,” the claimants wrote to the court.
At the start of the lengthy trial in May, a draft report by the accountancy regulator, used as evidence, concluded that EY’s audit of the collapsed NMC “was deficient in multiple respects” and that “these failings are extremely serious.”
The Financial Reporting Council (FRC) is still conducting a probe into EY’s work for NMC, and has not published any findings into this matter.
EY UK points blame at EY Middle East
In its 815-page written closing statements, EY argues it met the standard of a reasonably competent auditor and that any perceived failings were due to being misled by NMC’s management.
EY UK also pointed the finger at the role of EY Middle East, a separate legal entity, but part of the same global EY network. The lawyers for EY argued that the role of the firm as the group auditor was limited to planning, supervising, and reviewing the work of EY Middle East.
“NMC LLC could have sued EYME if the joint administrators had wanted to hear directly from its auditors, but for whatever reason, they have chosen not to do so,” it stated in its written closings.
Earlier in the trial, EY UK’s lead barrister described the former head of EY Abu Dhabi, Abdulrahman Basaddiq, as “plainly a fraudster”.
Basaddiq, who denied any wrongdoing, previously headed up EY’s operations in the United Arab Emirates and served as the country managing partner, was nominated by Sheikh Khadem Bin Butti in 2014 to join the NMC board as an independent director.
The barrister for the audit giant stated that Basaddiq “came to have a significant influence on other representatives of NMC” and used this to “deliberately deflect investigations into the fraud.”
Now, in its closing, EY has told the court it is not responsible for any EY Middle East failure unless it failed its distinct supervisory duties.
The closing arguments in this trial are set to conclude on Thursday, with one final day for replies scheduled next week. Dame Clare Moulder, a part-time judge, will deliver her judgment in the coming months.
Aidan O’Rourke, a partner at Quinn Emanuel Urquhart & Sullivan, acting for administrators, said: “The Joint Administrators are confident in their case that EY failed to discharge its duties as NMC’s auditor, and that those failures by EY caused significant loss.”
A spokesperson for EY said: “Evidence heard at trial showed that NMC was subject to a complex, co-ordinated and sophisticated fraud involving more than eighty key individuals in the business, including NMC’s former principal shareholders, directors and board members. The fraud was deliberately concealed and systematically designed to circumvent the audit process.”
“We remain unequivocal that responsibility for this fraud lies squarely with the perpetrators, who diverted billions of dollars from the business for their own personal gain and who have not been sufficiently pursued by the administrators,” they added.