The administrators to NMC Health are preparing to sue EY for more than £1bn over claims the Big Four audit firm was negligent when it signed off the group’s accounts during a “long term” multibillion-dollar fraud.
NMC Health, the former FTSE 100 healthcare group, collapsed this year after discovering that more than $4bn was apparently hidden from its balance sheet in a large-scale fraud that spanned operations from Abu Dhabi to London.
EY has overseen NMC’s accounts since the healthcare company floated in London in 2012. The quality of the firm’s audits has already been questioned due to the fact that NMC’s board included former EY partners.
Administrator Alvarez & Marsal said it had hired law firm Quinn Emanuel to make a claim against EY, and had already issued a preliminary notice informing the audit firm it intended to file a lawsuit.
In a progress report to creditors, Alvarez & Marsal said it was still investigating the size and scale of the fraud, how it had been perpetrated and by whom, as it sought to assess potential claims and recoveries.
“The investigation is complex given the well organised and long term nature of the fraud, coupled with the number of jurisdictions involved,” it said.
The Financial Reporting Council has already opened an investigation into EY’s audit of NMC’s 2018 financial statements.
The lawsuit is the latest blow for EY, which is facing large legal claims and regulatory scrutiny over its audit work in other high-profile scandals, such as Wirecard, the German payments processor that failed this year amid a €1.9bn fraud.
EY earned about £14m in audit fees from NMC Health over seven years.
EY said: “We can confirm that EY has received a preliminary notice to a letter of claim from the administrators to NMC Health. It would be inappropriate to comment further.”
One person close to the matter said: “It is thought that the fraud has been running since the point of the IPO. EY was the nominated accountant for the IPO and has also audited linked companies including Finablr.
“EY had a unique perspective on this group of companies, so the claim will be significant.”
The person added that it was likely to be “in excess of £1bn” but that calculations were still being carried out by lawyers and accountants ahead of filing the claim in the London courts. The administrator’s lawyers will have to prove that NMC’s financial performance would have been significantly different without the allegedly negligent EY audits in order to pursue the quantum of its claim.
NMC has been one of the biggest accounting scandals in the City of London in recent years. It was a respected member of the FTSE 100 until the end of last year, when short seller Muddy Waters began questioning its accounts and management.
The hedge fund also raised concerns over what it described as the “cosy” relationship between EY and NMC given the board included former partners of the audit firm, which it claimed meant there was a “lack of rigour” in its audits.
Although NMC initially denied the allegations, the company was quickly forced to conduct its own investigation that found billions in debt that had not been disclosed to the market amid allegations of management impropriety.
People close to the company have alleged that the fraud included false accounting, forged invoices and kickbacks.
Alvarez & Marsal said an estimate of payments for unsecured creditors was not yet possible. A number of NMC’s businesses are being sold to raise money, including IVF clinic operators in the US and Europe.
The report also shows that Alvarez & Marsal has so far earned more than £10m in fees overseeing the administration.
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