EY failed to flag a multibillion dollar fraud at FTSE 100 group NMC Health in the years before its 2020 collapse because the auditor did not properly carry out basic checks, according to a $2.7bn legal claim by the hospital operator’s administrators.
Abu Dhabi-based NMC was placed into administration in April 2020 after discovering that more than $4bn of debt was hidden from its balance sheet in one of the biggest alleged frauds at a London-listed company.
NMC’s post-tax profits were misstated by $317mn between 2012 and 2018 while its debts were misstated by nearly $3.9bn, according to a copy of the legal claim seen by the Financial Times. NMC, the United Arab Emirates’ largest private hospital group, reached a market valuation at its peak of $10.9bn.
The lawsuit alleges a litany of shortcomings by EY, including a failure to spot that NMC’s accounts had been fraudulently misstated, that its client did not keep adequate accounting records and that it had inadequate controls to prevent or detect fraud.
It should have been clear to EY that “there were material uncertainties that cast significant doubt” on NMC Group’s ability to continue as a going concern from at least 2014, it is claimed.
The claim filed in London’s High Court is the latest in a series of high-profile lawsuits against EY, which gave unqualified audit opinions over NMC’s accounts from its flotation in 2012 until its final set of figures signed in 2019.
EY’s UK business said it would “vigorously” defend the legal action.
The firm is under a separate investigation by the UK accounting regulator over its work at NMC. It is also a defendant in an $8bn claim filed in New York last year by NMC founder BR Shetty against the auditor, banks and the hospital group’s former chief executive.
The High Court allegations include a claim that the Big Four auditor failed to verify NMC’s bank and debt balances, an allegation with echoes of the fraud at Wirecard. The wrongdoing at the payments group could have been discovered earlier had the Big Four auditor not failed to request crucial account information from a Singapore bank where the company claimed it had up to €1bn in cash.
The lawsuit alleges that EY failed to obtain cash or debt balances from several of NMC’s banks. It is also claimed that auditors allowed NMC to contact banks directly to get confirmation of its debt balances and that some of these confirmations had been “manipulated”.
Administrators from Alvarez & Marsal also allege that EY should have detected that NMC’s revenues were fraudulently inflated in its accounts and that the hospital operator’s management had dishonestly caused NMC to incur large hidden debts and enter into guarantees over both hidden and reported debts.
EY’s alleged negligence also includes failure to notice that companies in the NMC group had entered into a large number of “unreported and improper transactions with related parties for the purpose of enriching senior management, financed in part by the group’s hidden borrowing”.
According to the claim, EY should have identified a series of factors indicating a risk of fraud, including the roughly 60 per cent stake held by founder BR Shetty and two other large shareholders, and the risk that NMC management “would draw no clear distinction between the interests of NMC . . . and their other business or personal interests”.
The audit firm’s Middle East operations had identified deficiencies in NMC’s IT systems as early as 2012, the administrators claimed. The fact these were developed in-house “gave management an opportunity to manipulate records” or be “selective” about which records were accessible during the audits, they alleged.
The lawsuit also argues that EY’s UK arm should be held responsible for failures by the firm’s franchise in the Middle East because the UK entity signed off the group’s accounts and should therefore have been sufficiently involved to lead and control the audit.
The claim seeks damages to cover $2.5bn in guarantees given by NMC on undisclosed borrowing, $169mn in dividends paid since 2012 in reliance on the accounts, $23mn in bonuses paid to NMC’s senior managers, $45mn in advisory fees and an undisclosed sum for the value of four subsidiaries, which was wiped out.
The amount claimed is more than four times EY’s most recent annual profits in the UK. Most lawsuits against auditors settle for a fraction of the total amount claimed.
NMC’s operations in the UAE came out of a separate administration process this year.