AUDITOR EY has been hit with a £3.5 million penalty in part for failing to properly challenge the management of Stagecoach when auditing the firm's 2017 accounts.
The Financial Reporting Council (FRC) said the auditor was not sceptical enough when evaluating the accounts.
The FRC said it had identified problems in how EY audited one part of Stagecoach's East Coast Main Line railway franchise contract, as well as elements of its pension schemes and insurance provisions.
It also slapped a £100,000 penalty on Mark Harvey, the EY partner who ran the audit.
A joint venture run in part by Stagecoach was awarded the East Coast Main Line franchise by the Government in 2014.
But by 2017 Stagecoach noted that the franchise was "not working for the group", the auditors found at the time.
Stagecoach thought it could re-negotiate part of the deal with the Department for Transport (DfT).
The auditors also thought that this was the most likely option, but the FRC found that they had "failed to obtain sufficient appropriate audit evidence to support the assertion".
The assertion proved to be wrong.
In 2018 the Government stepped in, and operations on the East Coast Main Line were returned to public control without a new contract for Stagecoach's joint venture.
EY and Mr Harvey "failed to apply proper professional scepticism to the assertions of Stagecoach's management about discussions and negotiations with the DfT and did not seek any third-party validation", the FRC said.
The FRC did not say the financial statements were mis-stated, but said the mistakes could have had a negative impact on a lot of people, including the public and investors.
It could also have hurt confidence in the work of auditors, the FRC said.
It discounted EY's financial penalty to £2.2m because the company co-operated with officials and put in place systems to try to ensure similar mistakes are not repeated in 2018.
The auditor and Mr Harvey were also given a lower penalty for admitting to the problems early.
Mr Harvey will have to pay £70,000.
The FRC has also required the two respondents to pay £596,735 to cover the costs of the investigation.
EY said: "Regrettably, on this occasion, we fell short of the standards we set for ourselves, and the standards expected of us by the FRC and society.
"We have cooperated with the FRC throughout their investigation, take their findings very seriously, and have worked hard to rectify the issues identified. No findings were raised in the FRC's review of our most recent audit of the company, for the 2020 year-end.
"We continue to make significant investments in audit quality across EY and, on July 1 this year, we established a new UK Audit Executive Committee and Audit Remuneration Committee. These will support our focus on delivering the highest levels of audit quality by building a culture of challenge and providing independent oversight of our UK audit practice."
Mr Harvey has been approached for comment.
