Ernst & Young are facing a lawsuit for more than £1bn over claims it was negligent in auditing NMC Health, an Abu-Dhabi -based healthcare conglomerate.
NMC Health, listed on the FTSE 100, faced financial ruin this year after more than $4bn debt was not shown on its balance sheets in a large-scale fraud that spanned operations from the UAE to London.
A “preliminary notice of potential claim” was issued against the auditor, by NMC Healthcare administrators, Alvarez & Marsal. The Financial Reporting Council of the UK has already initiated an investigation into how EY failed to account for the missing billions.
"Those investigations and formulation of claims identified are ongoing," Alvarez & Marsal said in the update. "Strategies are in the process of being developed to prioritize such claims in order to recover assets for the benefit of creditors."
EY was appointed to audit the healthcare company in 2012. Another point of contention is that NMC’s board included former EY partners.
Alvarez & Marsal said it was still investigating the size and scale of the fraud, as it sought to assess potential claims and recoveries. “The investigation is complex given the well organized and long term nature of the fraud, coupled with the number of jurisdictions involved,” it said.
EY is facing legal and regulatory scrutiny in some other audits too. Wirecard, the German payments processor, which also failed amid a €1.9bn fraud, was also audited by EY.
EY earned about £14m in audit fees from NMC Health over seven years. It said: “We can confirm that EY has received a preliminary notice to a letter of claim from the administrators to NMC Health. It would be inappropriate to comment further.”
The Financial Times reports a source as saying: “It is thought that the fraud has been running since the point of the IPO.”
NMC has linked companies that were audited by EY, including Finablr. “EY had a unique perspective on this group of companies, so the claim will be significant.”
The fraud is likely to be in access of £1bn. But the real number depends on the extent of the harm determined by the investigators. The administrators have to prove that the financial outcome of the company would have been affected by the deficient auditing of EY to pursue the claim.
According to a senior banker associated with the NMC fracas, "People leading audit and financial reporting at NMC and working closely with the E&Y are equally culpable. There was also a former official at the audit firm who later became a member of the NMC Board of Directors."
The NMC scandal is one of the biggest such accounting fraud to happen in recent years in London.
The investigations into the dealings started when short-seller Muddy Waters began questioning its accounts and management. They questioned the validity of EY ex-partners serving as board members in the company.
A follow-up investigation by NMC itself found irregularities in the audit running into billions. It is alleged that the fraud included false accounting, forged invoices and kickbacks.
Alvarez & Marsal said unsecured payments to creditors will be made only after the full extent of the fraud is determined. A strategy is being worked out to shed non-core businesses to raise money
Alvarez & Marsal itself has so far earned more than £10m in fees overseeing the administration.