Cleaning up the audit sector: why the government should consider banning Ernst & Young from public contracts

Author: Spotlight On Corruption

16th November 

On Friday 13th November, Spotlight on Corruption wrote to the government’s procurement body, the Crown Commercial Service, asking it to review whether the accountancy firm Ernst & Young (EY) should be banned from bidding on public contracts for three years.

EY has been hit by a number of recent scandals, including: advising a client to hide evidence of a illegal gold smuggling operation, not picking up signs of an extensive money laundering scheme at Danske Bank, as well as failing to identify fraud that has led to several firms collapsing including Wirecard and NMC Health. 

In a letter to the Crown Commercial Service, Spotlight on Corruption said that in light of EY’s failures in these and other scandals, which we believe may amount to grave professional misconduct that renders EY’s integrity questionable – failures that have seen EY face multiple investigations by regulators across Europe including in the UK – the firm’s suitability for public contracts should be reviewed. 

In particular, we are asking for a review of EY’s suitability to bid on two upcoming cross-government framework contracts for public sector consultancy services, and for public body audit services, as well as a contract for legal services. We are also calling on the government to require EY to undergo an independent assessment, at the expense of EY, into why the misconduct has occurred and what steps EY needs to take to ensure that misconduct does not happen again.

See our letter here and our background briefing here.

EY’s litany of misconduct

Although the Big Four more broadly has been criticised for audit failures in recent years, EY in particular has been at the heart of a number of high-profile corporate fraud and money laundering scandals. 

The High Court ruled in April this year that EY should pay $10.8m in compensation to Amjad Rihan, who had previously worked for the firm as an auditor in Dubai. EY ignored his concerns of a client’s suspected money laundering and smuggling of gold and instead sought to hide his findings from the authorities. Mr. Rihan was later forced to flee Dubai and described the High Court’s judgement as “total vindication” after he was “cruelly and harshly punished for insisting on doing my job ethically”.

The Financial Reporting Council is currently undertaking an investigation into EY for its audits into NMC Health plc as well as London Capital and Finance plc. The two firms are accused of committing serious fraud offences and later collapsed. 

EY is also facing investigation across Europe for major audit failures. The Danish Disciplinary Board is investigating the accountancy firm for failing to report money laundering at Danske Bank, who handled over €200 billion in suspicious cash transactions without EY flagging any concern. 

Germany is investigating EY’s role in the Wirecard scandal, where according to reports, EY auditors relied on screenshots and documents provided by a third-party trustee and Wirecard employees instead of requesting the information from the banks handling Wirecard’s accounts.

EY has been hit by €24 million worth of regulatory fines for violation of audit, conflict of interest and competition rules in Spain, Netherlands and Italy. 

The accountancy firm is also facing multiple investor suits worth over €1 billion for its auditing failures in the NMC and Wirecard cases. 

 

Sending a clear message on corporate misconduct and audit failure

A review of EY’s suitability for public contracts would send a clear message to EY and the wider audit sector that they must clean up their act and improve standards in order to access lucrative public contracts. 

Banning companies for a set period of time from public contracts (otherwise known as debarment) is increasingly recognised globally as an effective tool to protect the integrity of public contracting and prevent corruption, money laundering, fraud and other misconduct.

Unless companies like EY, that have a strong monopoly on public contracts, know that they will face consequences for poor behaviour and misconduct, there is little incentive for them to perform those contracts as efficiently and as well as possible.

Banning companies that engage in misconduct is a really important way to:

  • make government procurement fairer – it creates a level playing field for those companies that do the right thing; 
  • make sure taxpayer money is not lost or wasted by unreliable contractors;
  • make sure that companies get their act together and root out misconduct and wrongdoing.

For an overview of why debarment works, see blog by our Executive Director, Susan Hawley, here.