No order from DPP to resume inquiry into Anglo auditors

Criticisms of EY audit ‘incompetence’ disclosed at FitzPatrick trial in absence of jury

Seán Fitzpatrick leaving the Dublin Circuit Criminal Court, with  daughter Sarah, after he was acquitted of all charges.  Photograph: Collins Courts.

Seán Fitzpatrick leaving the Dublin Circuit Criminal Court, with daughter Sarah, after he was acquitted of all charges. Photograph: Collins Courts.

 

The regulatory inquiry into EY, formerly Ernst & Young, arising from its audits of Anglo Irish Bank during the 2000s, continues to be delayed despite the end of the Seán FitzPatrick trial.

During the trial, details of some of the inquiry’s findings, including criticisms of the audit work, were disclosed in the absence of the jury. These have not been reported publicly before.

Although the trial was told that the inquiry was on hold pending the end of the FitzPatrick proceedings, the regulatory body has said it has not received notice from the Director of Public Prosecutions that it can resume the work.

It is understood this is because of other matters still before the courts and not involving Mr FitzPatrick.

During his trial the conclusion of the former comptroller and auditor general, John Purcell, to the regulatory body’s complaints committee, was read out by Shelley Horan, for Mr FitzPatrick.

“On the basis of the documentary and oral evidence, EY’s actions point to incompetence in the performance of their professional duties, rather than misconduct or inefficiency,” she said, quoting the report to the Chartered Accountants Regulatory Board (Carb, now called Professional Standards).

Ms Horan read out the passage while putting questions to Nigel Grummitt, an expert witness on audits engaged by the Office of the Director of Corporate Enforcement for the purposes of the trial. He was not allowed to give evidence to the jury.

Mr Purcell’s finding was on a prima facie basis, which is a low threshold. EY disputes the finding.

Mr FitzPatrick was acquitted, on the direction of the judge, of charges of misleading the bank’s auditors in relation to loans he had from the bank and which he temporarily moved to Irish Nationwide at year’s end, each year for a number of years, so as to avoid having to declare them in Anglo’s accounts.

Investigation

Asked if this meant the inquiry could now resume, a spokesman for Professional Standards said that following an investigation carried out by Mr Purcell, certain matters pertaining to EY are due to be considered by a disciplinary tribunal.

“That hearing has been deferred since 2011 at the request of the DPP. The institute continues to liaise with the DPP in this regard.”

A spokeswoman for EY said it was a matter for the regulatory body.

During her cross-examination of Mr Grummitt, in the absence of the jury, Ms Horan read out some of the findings of an English firm called FTI, which was commissioned by Mr Purcell to examine some of the EY audit work.

FTI said that EY’s 2007 audit papers included a procedure for reviewing the accounting records for large or unusual transactions or balances, and in particular ones recognised at, or near the end of, the financial year.

“However no specific audit work was carried out to identify any such transactions,” FTI said.

In relation to the 2006 audit, the FTI findings, the court was told, said that in 2006 Mr FitzPatrick provided confirmation to EY showing 73 separate facilities totalling €63.6 million at the end of the 2006 financial year.

However, the total outstanding balance for loans to directors disclosed in the 2006 financial accounts was only €25 million,” Ms Horan said.

Ernst & Young do not appear to have identified or made further inquiries to explain this

Mr Grummitt said he had not been aware of this, or that there was no audit evidence of the two figures being compared.

Quoting further from the FTI findings, she told Mr Grummitt they said that EY had on the audit files some quarterly large exposure reports submitted by Anglo to the financial regulator.

“These reports show that Sean FitzPatrick’s outstanding loans were significantly higher throughout the year than they were at the 30th of September year-ends. Ernst & Young do not appear to have identified or made further inquiries to explain this.”

Exposure

The witness, who had not been given a copy of the FTI report to prepare his expert testimony, said he was not aware of these large exposure reports.

Ms Horan read out a number of figures from the FTI report for different years, contrasting what was in some quarterly reports and what was disclosed at year-end.

In quarterly reports for the 2004 financial year, quarterly loan figures for €31.5 million, €25.5 million and €25.8 million were set out but the figure for the end of the last quarter in the financial year was €0.8 million. “So there’s a significant drop in gross exposure to Mr FitzPatrick, isn’t that so?” Mr Horan said.

“Well, it certainly confirms there was a significant drop at the financial year-end compared with the other three quarters in the year,” Mr Grummitt said. Ms Horan said the quantum of loans for Mr FitzPatrick “effectively dropped like a stone on the 30th of September 2004”.

Mr Grummitt said he was not supplied with the large exposure returns when he was briefed for his testimony to the trial.

During the trial it emerged that the lead investigator with the ODCE, Kevin O’Connell, assured EY that it was not concerned with the issue of audit adequacy. He said he was concerned that if the office began to investigate the issue, it would have been less likely to receive co-operation from EY.

The Irish Bank Resolution Corporation (now in liquidation), has taken a €50 million legal action against EY arising out of audit issues. The case has also been delayed because of related matters before the criminal courts.