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EY accused of hiding US health firm’s audit fraud from investors

Ernst & Young alleged that it “actively concealed” six years of fraud from investors in a new lawsuit over its auditing work for troubled NMC Health.

The hospital operator’s founder, Bavaguthu Raghuram Shetty, said the accounting giant enjoyed a “deep and warm” relationship with the troubled firm’s executives, alleging that the auditors turned a blind eye to thousands of suspicious transactions. Shetty is seeking $7 billion from the lawsuit.

The Indian entrepreneur filed a lawsuit in New York last week, naming Ernst & Young as a co-conspirator in the fraud along with former executives, saying investors lost more than $10 billion.

Shetty’s counsel said in the court filing, “EY’s misconduct was not one of professional negligence, rather EY actively and knowingly conspired with the defendants to conceal their fraudulent conduct.”

The allegations of fake invoices and aggravated financial health between 2013 and 2019 are the most detailed so far of Shetty, who has been separately fighting the claims of creditors after the collapse of the NMC in April last year.

The firm was put into administration by a London court in April last year as the depth of the health care provider’s troubles emerged. The company’s shares fell in late 2019 before falling further amid allegations of fraud.

Shetty’s lawyers declined to comment beyond the trial.

legal crisis

The latest suit puts further legal and regulatory pressure on Ernst & Young, which is now preparing to defend several lawsuits over the quality of its audits.

“We believe this case is without merit and we intend to vigorously defend it,” Ernst & Young said in a statement on the US suit.

Shetty, who was the second largest shareholder in NMC, is seeking about $7 billion in the New York lawsuit. He has conducted his own investigation as he insists that he was the victim rather than the perpetrator of the fraud. He is facing trial from the main creditor of NMC, alleging that he supervised fraudulent transactions.

He has now turned his anger on the auditor, going from “a flexible auditor who conducted a soft audit” to an “active co-conspirator”.

Shetty said Ernst & Young, which audited NMC as well as other associated companies, never questioned the financial data and proceeded to rubber stamp the audit certificate. He said any arms-length review would show red flags, with thousands of transactions closed between the group companies.

On one occasion, the auditors verified account balances in a group company without obtaining the relevant bank details as claimed.

Ernst & Young, on the other hand, was sent a spreadsheet with the full 2019 sales figures, even though the document was prepared in September of that year.

He said the former executives forged Shetty’s signatures on 127 personal guarantees linked to loans worth about $4.5 billion. He said lenders are now seeking repayment on the same loans.

The former officials denied wrongdoing, a London judge said in a ruling on a separate case.

The New York lawsuit comes as the accounting firm faces a separate legal claim brought by Alvarez & Marsal, administrator of the NMC in London. The auditor is also being investigated by the UK’s accounting watchdog on NMC’s 2018 financial statements.

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