EY to spend €1.6bn on improving audit quality after scandals

EY will invest about $2 billion (€1.69 billion) over the next three years to improve the quality of its audits following scandals including the collapse of German payments group Wirecard in a high-profile fraud last year.

The sum will be part of a record $10 billion (€8.45 billion) investment plan unveiled by the accounting firm on Wednesday that will fund initiatives including staff training and improving its ability to detect fraud.

Along with its rivals, EY has come under pressure to invest in its business to strengthen audit processes. It has suffered a series of setbacks including its failure to sound the alarm over a fraud that toppled Wirecard, a company it audited for a decade, and its work on collapsed FTSE 100 medical group NMC Health.

Last month EY was fined £2.2 million (€2.5 million) by the Financial Reporting Council and issued with a severe reprimand for failings in its audit of London-listed transport company Stagecoach.

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Chief executive Carmine Di Sibio said EY would invest $2.5 billion (€2.9 billion) between 2022 and 2024 in new technology, including in artificial intelligence and machine learning for its audit platform, Canvas. He added the investment would “allow us to do a better audit and a more efficient audit” and improve the group’s chances of detecting fraud. In total, Di Sibio said about $2 billion (€1.69 billion) of the three-year investment would “impact audit quality”.

EY typically invested about $1.8 billion-$2 billion (€1.5 billion-€1.69 billion) a year in its business after paying its partners and staff, he added. The roughly $1.3 billion (€1.1 billion) of fresh annual investment would come out of profit following a “very good year. . . around the world from a growth perspective”.

Remote working

The group said it had also made significant cost savings as the shift to remote working during the pandemic had reduced travel and hotel expenses.

Di Sibio stressed that EY had strengthened its processes around “client acceptance and client continuance” as a result of the Wirecard scandal. The group now undertook a more rigorous investigation of current and future clients, he said, including scraping social media sites, and was investing in more training for its auditors in fraud detection. About $500 million (€423 million) a year will now be spent on staff training.

“If you [become] a client of EY we will do a lot more in terms of investigation of who you are,” said Di Sibio. “If you think about Wirecard at the end of the day the people we were dealing with were not good people.”

EY reported a 4 per cent increase in global revenue to $40 billion (€33.8 billion) for the year to the end of June 2021, following a boom in demand for its services as clients struggled to adapt to remote working and digitise their processes. A surge in dealmaking towards the end of the year also lifted revenue.

EY is not alone in facing criticism over the standard of its audits. In July the FRC said 29 per cent of the sample of 103 audits it reviewed across the industry required improvement or significant improvement.

In its last financial year EY grew its assurance division, which includes audit, by 2.5 per cent in revenue terms. Tax increased 3.9 per cent and consulting (previously known as advisory) rose 3.5 per cent.

– Copyright The Financial Times Limited 2021