Watchdog will have plenty to sink its teeth into over EY’s questionable auditing of NMC Health

NMC Health

Alarm bells were set off after company given a clean bill of health by its auditor ends up going bust​

The independent auditor’s report attached to the 2018 accounts of NMC Health runs to an impressive nine pages. Compiled by illustrious Big Four accountants EY, it is now rightly the focus of an investigation by the Financial Reporting Council (FRC) after the Middle East hospital operator’s recent spectacular collapse.

There is plenty for the watchdog to get its teeth into but the essential point is this: how did a company that was given a clean bill of health by its auditor end up going bust with more than $4bn (£3.2bn) of undisclosed loans 13 months after the accounts were signed off?

EY apparently found nothing to stop it from declaring that the “financial statements give a true and fair view of the state of the group’s affairs” in March 2019.

Yet, only months later, up popped short-seller Muddy Waters with the sort of forensic analysis you would hope is EY’s bread and butter.

NMC had “deliberately understated its debt”; its margins were “too good to be true”; the company’s cash position “materially overstated”; and the interest income it earned “seems low”, Muddy Waters claimed. All the charges were repeatedly denied by NMC.

But don’t let the FRC stop there. What about EY’s claims of independence? It is not without reason that Muddy Waters likened NMC to “a retirement plan for former Ernst & Young partners”. The company counted three former EY partners on its board: senior independent director Jonathan Bomford; and independent directors Abdul Rahman Basaddiq and Bassam Hage.

Basaddiq and Hage also sat on the board of Finablr, a second company floated by NMC founder BR Shetty that also employed the services of EY as auditor.

Then, of course, there’s the £14m of fees that EY pocketed for overseeing the firm’s books from 2012 to March this year, including more than £3m for dreaded “non-audit services”, such as consultancy and advisory work.

Steve Varley will be unimpressed as he prepares to step down as EY’s UK managing partner. Unlike rivals PwC, Deloitte and KPMG, the firm had managed to keep its nose clean last year, but suspected wrongdoing has also been uncovered at Finablr since EY resigned as auditor.

And recently the High Court ordered EY to pay $11m to an ex-partner who was forced out after blowing the whistle on suspected smuggling at a former client. All three cases involve companies with links to the United Arab Emirates.

Still, at least EY has found the perfect man to take over: head of audit Hywel Ball.

Time to send SHI packing?

Bankrupt by the end of the year. That’s the latest verdict on easyJet from largest shareholder Sir Stelios Haji-Ioannou, or SHI, as insiders have started calling him. No prizes for guessing which letter comes next.

The tycoon’s frothing-at-the-mouth missives have been coming at the rate of about once a week since the start of April as the two sides head for a dramatic showdown later this month.

Investors will vote on May 22 on its founder’s proposal to remove four “scoundrel” directors, including chairman John Barton and “ex-overpaid holiday rep” boss Johan Lundgren, as Sir Stelios insists on calling him.

So what’s new in the latest bulletin? Well, the primary demand remains the same – that easyJet cancels a bumper order for 107 new planes. Sir Stelios reckons it’s worth £4.5bn. The board says that is wrong but hasn’t offered an alternative figure.

Perhaps the numbers don’t matter as much as the central point – that purchasing any new planes when your current fleet is grounded doesn’t make sense. But then the board insists there is no “force majeure” clause allowing it to just walk away. And if it did, easyJet would face significant damages.

Sir Stelios argues it would be worth it because the final bill is likely to be a fraction of what easyJet owes Airbus for more than 100 planes.

Yet, getting into a costly legal fight with the company that looks after the rest of the fleet doesn’t seem very clever. The only alternative plane supplier is Boeing, whose 737 Max model is grounded because it has a habit of falling out of the sky, as Sir Stelios himself acknowledges.

Besides, under the contract terms easyJet can reduce the fleet by nearly 60 planes to 281 over the next three years, not far off the 250-level Sir Stelios wants to see. That seems like a sensible compromise, which avoids an unnecessary punch-up with Airbus.

SHI also conveniently skirts over management’s war-plan to stay afloat, which is pretty comprehensive and gives the airline at least nine months of breathing space before things get really dicey.

The rest of the 25-page tome is drowned out by silly personal attacks that are as bad as his appreciation of the facts. Shareholders should send Sir Stelios packing.