FRC HAS ANNOUNCED A SETTLEMENT with EY and its partner Alan Flitcroft, over their audit work of Farepak's parent company European Home Retail (EHR).
A formal complaint was made against EY and its partner Flitcroft for their conduct as auditors of EHR and its subsidiaries, including collapsed Christmas savings company Farepak Food & Gifts, last year.
Farepak collapsed in 2006, depriving more than 100,000 customers of their Christmas savings, with a total loss of about £37m.
As part of the settlement EY and Flitcroft admitted their conduct fell below the standards expected of ICAEW members and that they failed to comply with applicable auditing standards.
They agreed they had failed to adequately obtain sufficient audit evidence to enable them to draw reasonable conclusions on which to base their audit opinion.
A statement from the FRC said that EY and Flitcroft had agreed they failed to: "properly consider Farepak's ability to continue as a going concern; properly consider whether any relevant disclosures were required in the financial statements to give a true and fair view; make proper enquiries of the directors and examine the appropriate financial information.
"In particular EY and Mr Flitcroft failed to: Identify adequately the liquidity and cash flow problems facing EHR and by extension Farepak, that had arisen since the balance sheet date, principally the absence of headroom in January and February 2006."
As part of the settlement EY are to pay a fine of £750,000, adjusted from £850,000 due to its admission, and receive a reprimand. They are also due to pay £425,000 of costs. Flitcroft is due to pay a fine of £50,000, reduced from £60,000 follwoing his admission, and receive a reprimand.
A statement by EY said: "As confirmed in the settlement agreement the executive counsel: ‘does not allege any causative link between EY/Alan Flitcroft's conduct and; (i) Farepak's entry into administration; (ii) the timing of Farepak's entry into administration; and (iii) the losses to the Farepak savers'. However, EY regrets that aspects of our 2005 audit fell beneath our usual high standards.
"EY invests significant resources globally and in the UK to develop our audit methodology, tools, training and other resources to support quality delivery."
Earlier this year Farepak director and CEO of its parent company William Rollason was dished out a fine of £15,000, handed a costs bill of £50,000 and was severely reprimanded by the FRC in a settlement.
As part of the settlement Rollason agreed he had acted recklessly, in a way that was contrary to the fundamental principle of integrity as set out in the ICAEW guide to professional ethics.
He also accepted he had drafted and distributed to his fellow directors a memorandum which could mislead as to the true financial position of the business.
In an FRC document dismissing a request to have the complaint against Rollason struck out, it was revealed that the tribunal had formally dismissed complaints against EHR group FD Stevan Fowler and Farepak FD Stephen Hick in November 2012.
A case against the directors brought by the Insolvency Service, earlier this year, collapsed after the presiding judge blamed Farepak's bank, HBoS, and not the directors. The bank, now part of Lloyds, donated £8m to the Farepak compensation scheme.
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