EY Sanctioned Over Made.com Audit Failures as FRC Cites Weak Challenge of Management Forecasts

Key Takeaways

• Audit Standards Breached: The Financial Reporting Council found Ernst & Young breached International Standards on Auditing in its 2021 audit of Made.com by failing to sufficiently challenge management forecasts supporting the company's going concern assessment and deferred tax asset.
• Financial Sanctions: EY was fined £1,197,000, received a severe reprimand, and its 2021 audit report was declared not to have satisfied the relevant professional requirements.
• No Finding Against Financial Statements: The regulator said its decision does not call into question whether Made.com's 2021 financial statements presented a true and fair view.
• Forecast Evidence: The FRC concluded EY did not obtain sufficient audit evidence or adequately consider information available up to the date of its audit report when evaluating management's forecasts.

Deep Dive

The UK's audit watchdog has fined Ernst & Young £1,197,000 after concluding the firm failed to obtain sufficient audit evidence in critical areas of its 2021 audit of online furniture retailer Made.com Group, shortcomings the regulator said stemmed from an inadequate challenge of management's forecasts.

The Financial Reporting Council's Executive Counsel issued a Final Settlement Decision Notice on Monday after EY admitted breaches of the International Standards on Auditing during its audit of Made.com's financial statements for the year ended Dec. 31, 2021. Alongside the financial penalty, the regulator issued a severe reprimand, declared that EY's audit report did not satisfy the relevant professional requirements, and ordered the firm to pay the costs of the investigation.

The enforcement action focuses on two areas that relied heavily on management's expectations for the future: Made.com's assessment that it remained a going concern and the recoverability of a deferred tax asset.

According to the FRC, EY failed to perform adequate procedures to assess the accuracy and reliability of management's forecasting models, did not sufficiently challenge key assumptions, and inadequately evaluated downside scenarios when assessing whether the company could continue operating as a going concern. The regulator also found the firm failed to obtain sufficient appropriate audit evidence supporting the recoverability of the deferred tax asset.

In both areas, the FRC concluded EY did not appropriately consider information available up to the date of the auditor's report when assessing the reliability of management's forecasts.

The regulator was equally clear about what its decision does not say. The settlement notice does not question whether Made.com's 2021 financial statements presented a true and fair view. Instead, it addresses whether the audit work supporting EY's opinion met the standards required of the profession.

Focus on the Audit, Not the Outcome

Made.com entered 2021 riding a wave of demand created during the COVID-19 pandemic. The online furniture retailer listed on the London Stock Exchange's main market in June that year, but the business came under mounting pressure in 2022 as supply chain disruption and weakening consumer demand eroded its performance.

Trading updates released in May and July 2022 signaled the deterioration, while the company's interim financial statements reported a loss before tax of £35.3 million. EY later issued a disclaimer of opinion on those interim results, primarily because of material uncertainties related to the company's ability to continue as a going concern.

In September 2022, Made.com's board announced it had engaged financial advisers to explore a sale of the business. Less than two months later, on Nov. 8, the company entered administration.

Those events provide the backdrop to the enforcement action but are not the basis for it. The FRC's findings concern the quality of the audit work performed on the 2021 financial statements, not the retailer's subsequent collapse.

Executive Counsel Penrose Foss said the auditors relied on management's forecasts without applying sufficient challenge or carrying out adequate testing to obtain the evidence needed to support their conclusions. Without that scrutiny, he said, there is a heightened risk that financial statements present an inaccurate picture of a company's financial position.

The penalty imposed on EY was reduced from an initial £1.8 million after a 5% reduction for mitigating factors and a further 30% discount for admissions and early disposal. The firm admitted the failings identified by the FRC and cooperated throughout the investigation.

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