Britain’s accounting regulator has fined EY £1.197 million after identifying significant failings in its audit of Made.com Group PLC, completed less than a year before the online furniture retailer entered administration. The Financial Reporting Council (FRC) also imposed a personal fine of £49,000 on audit engagement partner Julie Carlyle, with both parties receiving severe reprimands and being ordered to pay the regulator’s investigation costs.

The sanctions relate to EY’s audit of Made.com’s financial statements for the year ended 31 December 2021. Although the FRC stressed that it did not conclude the company’s accounts were misstated or failed to present a true and fair view, it found the audit fell below the standards expected in two critical areas: the assessment of Made.com’s ability to continue as a going concern and the recoverability of a deferred tax asset.

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FRC highlights failures to challenge management assumptions

The FRC concluded that EY and Carlyle failed to carry out adequate procedures to assess the accuracy and reliability of management’s financial models. Auditors were found to have relied too heavily on management forecasts without sufficiently challenging the assumptions underpinning them or properly testing downside scenarios that could have affected the retailer’s future viability.

The regulator also found that EY failed to obtain sufficient appropriate audit evidence to support the recoverability of Made.com’s deferred tax asset. Furthermore, information available before the audit report was signed should have prompted greater scrutiny of management’s forecasts in light of the company’s weakening financial position.

Penrose Foss, the FRC‘s Executive Counsel and Executive Director of Enforcement and Investigations, said: “In this case the auditors relied on management’s forecasts without applying sufficient challenge or carrying out adequate testing to obtain sufficient evidence.

“Absent such challenge and evidence, there is a heightened risk that financial statements present an inaccurate picture of a company’s financial position.”

The financial penalties were reduced by 30% after EY and Carlyle admitted breaches of International Standards on Auditing, cooperated with the investigation and agreed to an early settlement. The original sanctions would have totalled approximately £1.87 million.

Why Made.com entered administration

Made.com enjoyed rapid growth during the Covid-19 pandemic as consumers spent heavily on home furnishings while spending more time at home. The business floated on the London Stock Exchange in June 2021 with a valuation of around £775 million, reflecting strong investor confidence in its direct-to-consumer business model.

However, conditions changed dramatically over the following 18 months.

Global supply chain disruption increased shipping costs and extended delivery times, while inflation and the cost-of-living crisis weakened consumer demand for discretionary purchases such as furniture. The company also found itself holding excess inventory as demand fell sharply from pandemic highs.

Made.com issued a series of profit warnings during 2022 before announcing in September that it was exploring strategic options, including a potential sale. When no rescue deal emerged, the retailer entered administration in November 2022, resulting in hundreds of job losses. Its brand and intellectual property were subsequently acquired by Next for approximately £3.4 million.

Notably, during 2022 EY issued a disclaimer of opinion on Made.com’s interim financial statements because it could not obtain sufficient evidence regarding the company’s ability to continue as a going concern, underlining how quickly the retailer’s financial position had deteriorated.

EY responds to the sanctions

EY accepted the regulator’s findings and said it had already strengthened its internal audit guidance in the years since the Made.com engagement.

An EY spokesperson said: “The delivery of high-quality audits remains our priority. While there was no suggestion by the FRC that the FY21 financial statements had been misstated, we are committed to learning from this matter and, in the years since this audit, have updated our internal guidance as part of our focus on continuous improvement.”

Lessons for auditors and corporate governance

The enforcement action reinforces the FRC’s continued focus on professional scepticism and robust testing of management assumptions, particularly where companies face uncertain trading conditions.

Although the regulator did not find that EY’s shortcomings caused Made.com’s collapse or that the retailer’s 2021 accounts were inaccurate, the case demonstrates the importance of auditors independently validating management forecasts rather than accepting them at face value. As economic conditions become more volatile, regulators are increasingly expecting auditors to apply greater scrutiny to going concern assessments, forecast modelling and the evidence supporting significant accounting judgements.