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The UK accounting regulator has hit EY with a £295,000 penalty after the accounting firm breached a fee cap in relation to its client Evraz, the Russian steel company in which oligarch Roman Abramovich was at the time the largest shareholder.
The Financial Reporting Council imposed a fine of just over £250,000 and costs of £45,000 on the Big Four firm after EY failed to adhere to the watchdog’s ethical standard rules for its 2021 audit of Evraz. EY also received non-financial sanctions, including a reprimand.
The FRC’s fee cap is intended to minimise conflicts between audit and other services such as consulting by restricting the amount of non-audit services that firms can provide to so-called public interest entities (PIEs). 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.
“The ethical standard sets clear limits on the value of non-audit services an auditor can provide,” said Claudia Mortimore, deputy executive counsel at the FRC.
“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 May EY was hit with a £4.4mn fine by the FRC for failures in its audit of defunct investment group London Capital & Finance.
Evraz is headquartered in Moscow but was incorporated in the UK at the time of the breach, the FRC said. Its shares were listed on the London Stock Exchange until March 2022 when they were suspended after Abramovich was hit with sanctions by the UK government following Russia’s full-scale invasion of Ukraine.
At the time, the then-owner of Premier League football club Chelsea was accused of being involved in “destabilising Ukraine and undermining and threatening the territorial integrity, sovereignty and independence of Ukraine via Evraz”.
The fee cap breach occurred when Evraz engaged EY in early 2021 to dispose of the group’s coal-related interests, which were principally held through a Russian company, in a plan known as “Project Gemini”.
The cap on fees that the Big Four firm could receive for its work on this project was $280,000, the FRC said. However, the total fees EY UK netted for its advisory services that were subject to the cap amounted to $535,000, almost double the permitted limit.
EY, which started checking Evraz’s books in 2011, resigned as the company’s auditor in November 2022.
EY said it “fully co-operated” with the FRC throughout the investigation, adding: “We are committed to learning from this matter and have since enhanced our internal guidance, training and procedures.”
