EY faces £2bn lawsuit over “extremely serious” audit failings at NMC Health

The UK accounting watchdog has identified “extremely serious” failings in EY’s audits of NMC Health, according to claims aired at the High Court this week, as the Big Four firm faces a £2bn negligence lawsuit brought by the hospital group’s administrators.

The case, brought by Alvarez & Marsal on behalf of creditors, centres on EY’s audit work for NMC Health — the former FTSE 100 private healthcare operator that collapsed in 2020 after the discovery of billions of dollars in off-balance sheet debt.

The administrators allege EY missed a series of red flags and failed in its duties to maintain professional scepticism and audit rigour.

According to court documents, EY is accused of not scrutinising NMC’s general ledger — a foundational financial record — which the claimants argue would have uncovered evidence of fraud.

EY also allegedly failed to properly control its communication with NMC’s banks, allowing company executives to manipulate statements before they were used to confirm NMC’s financial position.

The Financial Reporting Council (FRC), which began investigating EY’s audits of NMC in 2020, has not yet published its final findings. However, excerpts from its provisional 563-page report were disclosed in court on Monday.

The regulator reportedly found that EY “failed to perform adequate audit procedures, to bring objectivity to bear, and to exercise professional scepticism.”

One section of the FRC’s report, quoted by the administrators’ lawyers, stated that EY had ignored a “very significant inconsistency” between NMC’s reported debts and a creditor’s statement, an issue which “should have prompted major investigation”.

The FRC also raised concerns over audit team independence, noting that two EY Middle East employees remained involved beyond the usual time restrictions.

Further criticism was directed at a UK audit partner accused of compromising objectivity after threats from NMC to terminate the engagement.

EY, which earned £14 million for its audits of NMC between its 2012 IPO and its collapse, has denied any wrongdoing.

In written submissions, the firm argued it was a “principal target” of a “pervasive” fraud and had neither a duty nor the ability to uncover it. The firm also said it “comprehensively challenged” the FRC’s provisional conclusions.

The trial is expected to run until October, with EY’s formal defence scheduled to begin on Wednesday. The FRC’s final decision on the matter — which could include financial penalties or settlement terms — will follow the conclusion of its own review process, currently ongoing.

The case marks another high-profile scrutiny of Big Four auditing standards and comes amid broader questions about the profession’s role in large corporate failures.

The fallout from NMC’s collapse, which has drawn legal and regulatory attention from London to Abu Dhabi and New York, remains one of the most consequential accounting scandals in recent memory.

The case continues.