U.S. accounting regulators are censuring and banning a Canadian partner of Ernst & Young LLP for a year for his flawed work on the audit of Just Energy Group Inc., an Ontario company that understated its potential bad debts by more than $100-million in 2019.
The Public Company Accounting Oversight Board (PCAOB) said Martin Lundie – who retired Dec. 31 from the Toronto office – is barred from being associated with any public accounting firm registered in the United States, including EY’s Canadian firm. He may apply for reinstatement after one year, the PCAOB says.
The PCAOB also imposed a US$65,000 penalty on Mr. Lundie.
To date, there is no publicly announced enforcement action against Mr. Lundie by the Chartered Professional Accountants of Ontario, the body charged with disciplining individual accountants in the province. Similarly, the Canadian Public Accountability Board, which regulates firms that audit public companies, has not announced any actions against EY for the Just Energy audit.
Mr. Lundie could not be reached for comment. He entered into a settlement without admitting or denying the findings, the PCAOB says.
“We’re not able to comment on the settlement for this individual, whose career is otherwise characterized by a valuable contribution to our firm, its clients and the community,” EY spokesperson Victoria McQueen said in a statement. “The event here occurred over three years ago, and does not include any action against the firm or any allegations concerning its system of quality control.”
Just Energy, which entered bankruptcy protection in March, 2021, provided energy to residential and commercial customers, largely in Texas and Britain. It listed its shares both on the Toronto Stock Exchange and the New York Stock Exchange, which gave U.S. jurisdiction over its financial reporting.
In August, 2019, the company restated its financials, determining it had underestimated its allowance for bad debts by $111.2-million.
Just Energy billed its customers each month based on monthly energy consumption; it recorded unpaid amounts as accounts receivable. By March, 2019, accounts receivable were $476.2-million, or 27 per cent of the company’s assets.
Just Energy typically wrote off bills that went unpaid for more than 120 days. And, per accounting rules, it recorded an allowance against its accounts receivable to reflect amounts that it thought were not likely to be collected, even if they weren’t written off.
To estimate that allowance for its fiscal 2019 year, however, Just Energy applied historic write-off rates to its revenue numbers. The PCAOB says Just Energy chose that method “because it lacked sufficiently reliable ... data” to calculate its expected credit losses in a more direct fashion.
The company identified estimates and accounting policies surrounding receivables as “critical,” which required EY and Mr. Lundie to place greater scrutiny on Just Energy’s decisions, the PCAOB says. “The higher the risk of material misstatement, the more evidence the auditor should obtain, and the more persuasive that evidence should be,” the PCAOB says in its settlement order.
The PCAOB says Mr. Lundie failed to obtain sufficient evidence to either test management’s numbers or develop an independent estimate to corroborate them.
The PCAOB claims Mr. Lundie “had concerns about the accuracy and precision” of Just Energy’s calculations and knew management had “struggled to give” EY’s auditors reliable loss data during the audit. PCAOB also says he knew the company’s write-offs were not done on a regular basis with a systematic approach.
Mr. Lundie ultimately authorized EY Canada’s issuance of an unqualified opinion on Just Energy’s 2019 financial statements on May 15 of that year, with no “material weaknesses” in internal controls that might lead to a restatement. The company restated its financials less than three months later.
EY Canada is a defendant, along with Just Energy, in an Ontario class-action securities-fraud lawsuit alleging Just Energy made inadequate disclosure about its material internal control deficiencies, and that those deficiencies ultimately resulted in the understatement of Just Energy’s bad-debt allowances.
Just Energy emerged from creditor protection in December, 2022, as a private company, ending its listing on the Toronto Stock Exchange.
The company declined to comment for this story.
David Milstead