UK FRC fines EY for Farepak’s audit work

The UK Financial Reporting Council (FRC) has fined EY UK £750,000 ($1.2m) after the firm admitted their conduct in relation to Farepak Food and Gifts' 2005 financial statements fell below what is reasonably to be expected of a member of the Institute of Chartered Accountants in England and Wales.

The body also fined former EY auditor Alan Flitcroft £50,000 for the same case. Both fines were reduced to reflect the fact both EY and Flitcroft admitted their mistakes.

Farepak, a Christmas savings firm and a subsidiary of European Home Retail (EHR), collapsed in October 2006 following profit warnings in June that year, leaving 114,000 people with losses of £37m.

The FRC found that in their audit of Farepak's 2005 financial statements, EY and Flitcroft had failed to obtain sufficient and appropriate evidence in relation to subsequent events, to enable them to draw reasonable conclusions on which to base their audit opinion.

They also failed to perform adequate procedures to obtain sufficient audit evidence that all material subsequent events up to the date of their audit report which required adjustment of, or disclosure in, the financial statements had been identified and properly reflected.

Furthermore, there was not adequate corroborative evidence for assertions made in a letter of representation regarding balance sheet events from 8 February 2006, and EY and Flitcroft failed to properly evaluate whether representations made in the letter appeared reasonable and consistent with other audit evidence obtained.

EY and particularly Flitcroft also failed to properly seek or obtain corroborative evidence for the assertions made regarding going concern in the same letter. Similarly to the balance sheet assertions, EY and Flitcroft failed to properly evaluate whether the going concern assertions made in the letter appeared reasonable and consistent with other audit evidence obtained.

In relation to Farepak's 2005 financial statements, the firm and auditor 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, as well as make proper enquiries of the directors and examine the appropriate financial information.

In particular, the FRC noted that EY and Flitcroft failed to adequately identify the liquidity and cash flow problems facing EHR and by extension Farepak that has arisen since the balance sheet date, principally the absence of headroom in January and February 2006.

In addition to the fine, EY and Flitcorft received an official reprimand by the FRC, and EY agreed to refund the FRC's executive counsel the investigation costs worth £425,000.

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