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NMC Health administrators to sue EY for $4bn over audit work

Suban Abdulla
·3-min read
UKRAINE - 2019/03/16:  In this photo illustration, the NMC Health PLC logo seen displayed on a smartphone. (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)
The private healthcare group collapsed earlier this year after it was discovered that over $4bn was allegedly hidden from its balance sheet in a “long-term” fraud that spanned operations from Abu Dhabi and London. Photo: Igor Golovniov/SOPA Images/LightRocket via Getty Images

Alvarez & Marsal, administrators of NMC Health are gearing up to sue EY — the former auditor of the former FTSE 100 (FTSE^) company.

The administrators for NMC, which is embroiled in an alleged fraud scandal claim that EY auditors were “negligent” when they signed off the group’s accounts during the supposed multi billon-dollar fraud.

In a progress report to creditors, the administrators said that they had “interviewed and selected leading counsel” to advise them in relation to possible actions and that it has issued EY a preliminary notice informing the auditor of their intention to file a legal claim.

“The investigation is complex, given the well-organised and long-term nature of the fraud, coupled with the number of jurisdictions involved,” Alvarez & Marsal said.

It is the latest blow for EY, which is already facing large-scale legal suits and regulatory scrutiny over its audits in other high-profile scandals including, Wirecard — the German payments processor that filed for insolvency this year amid a €1.9bn ($2.3bn, £1.7bn) hole in its accounts.

The Financial Reporting Council (FRC) has also opened an investigation into EY’s audit of NMC Health’s 2018 financial statements.

The private healthcare group collapsed earlier this year after it was discovered that over $4bn (£3bn) was allegedly hidden from its balance sheet in a “long-term” fraud that spanned operations from Abu Dhabi and London.

The $4bn represents the level of undisclosed debts at NMC uncovered by investigators.

READ MORE: EU watchdog criticises Germany for oversight failures in Wirecard scandal

The Big Four accounting firm has been overseeing NMC’s accounts since the company floated in London in 2012.

EY earned approximately £14m ($18.5m) in audit fees from NMC over seven years. Alvarez & Marsal earned more than £10m in fees overseeing the administration.

Separately, questions have been raised over the quality of the auditor’s work as well its independence after it was revealed that former EY partners sat on NMC’s board.

Abu Dhabi-based NMC runs private hospitals in the Middle East and also owns the Aspen Healthcare chain in the UK.

The NMC situation has been one of the biggest accounting scandals the City of London has seen in recent years. It was first uncovered when short-seller Muddy Waters raised questions about the firm’s accounts.

Initially, it denied the allegations but it was forced to conduct its own investigation, which found billions in debt that were not disclosed to the market amid allegations of management impropriety.

READ MORE: Deloitte fined £362,000 by watchdog for pension scheme audit failure

It comes after, the FRC on Friday fined Deloitte £362,500 and reprimanded a former partner over failing to relate to the audit of a former client’s defined benefit pension.

The audit watchdog said the accounting firm did not ensure that the work carried out by the Engagement Quality Control Review (EQCR) was properly documented.

It also added that the Big Four firm did not obtain sufficient audit evidence to substantiate the cash holding of the client’s pension scheme. The fine was discounted from £500,000 for admissions and/or early disposal.

The former client in case has not been named by the FRC or the identity of the former partner.

Watch: Wirecard scandal puts regulators, EY in hot water