The FRC has handed down a £251k sanction to EY UK after the firm was found to have exceeded the 70% fee cap on non-audit services.

EY has been hit with a six-figure sanction in relation to the audit of a multinational mining group. Headquartered in Moscow but incorporated in London and listed as a FTSE 100 company, Evraz’s shares have been suspended from trading on the London Stock Exchange since March 2022.

EY UK audited Evraz from when it was listed in the UK in 2011 until its resignation as auditor in November 2022 following the imposing of UK government sanctions against the Russian Federation in response to the invasion of Ukraine.

The Financial Reporting Council (FRC) – which imposed the sanctions for the audit of the company’s financial statements for the year to 31 December 2021 – stressed that there is “no suggestion that EY has in any way failed to comply with its obligations under applicable sanctions laws”.

Non-audit cap
The issue relates to the Revised Ethical Standard 2019, which imposes restrictions on the amount of non-audit services that an audit firm may provide to a public interest entity.

The cap on non-audit work is “70% of the average of the fees paid to the audit firm over the previous three consecutive years”. This applies at both network level (members of the global EY network) and at firm level (EY UK), with EY UK having tested the fee ratio at network level but not at firm level, and so “accepted and carried out non-audit work in breach of the 70% fee cap”.

The FRC noted that this breach was “not intentional or dishonest”.

Six-figure sanction
Despite this, the firm has been sanctioned, with the financial element comprising £121,305 in respect of the disgorgement of profits earned on fees in excess of the fee cap and an additional £200,000 component, which has been discounted for admissions and early settlement to £130,000.

As such, the total financial sanction is £251,305.

The non-financial sanctions comprise:

a published statement in the form of a reprimand
a root-cause analysis report to be prepared and presented to the FRC identifying the reasons for the breach and actions taken since
any further remedial action proposed by the FRC to be implemented as necessary.
EY UK has also paid the costs of the executive counsel’s investigation.

Systems and controls failure
Claudia Mortimore, the FRC’s deputy executive counsel, said: “The ethical standard sets clear limits on the value of non-audit services an auditor can provide. Its aim is to uphold high standards of auditor independence and ensure public confidence in audit.

“In this instance, EY’s systems and controls failed to ensure compliance with the ethical standard, which led to the fee cap being breached.

“In addition to the financial sanctions announced, EY is required to report to the FRC on the reasons for the breach and to provide assurance that appropriate measures are in place to avoid any future recurrence.”

EY UK has been contacted for comment.