Journalist
Share this content

Grant Thornton loses appeal of £22.6m AssetCo case

Grant Thornton has lost its lengthy appeal to overturn £22.6m in damages over its “flagrant breaches of duty” when it failed to disclose fraud of former client AssetCo.

2nd Sep 2020
Journalist
Share this content
The Grant Thornton office building lit up at night in City Quay, Dublin, at Christmas time.
istock_Derick Hudson_aweb

Grant Thornton has failed to overturn a record £22.6m claim for damages brought by a former client AssetCo over a “negligent” audit which almost sank the AIM-listed company.

The Court of Appeal rejected the accounting firm’s bid to dismiss the damages, however, the judge reduced the damages by 25% from just over £29.8m to reflect AssetCo's contributory fault.

The 493-page judgment handed down last year outlined serious failings and “flagrant breaches of duty” by Grant Thornton, the sixth-largest accounting firm in the UK, in regard to an audit of the financial statements of AssetCo for the financial years ended 31 March 2009 and 31 March 2010.

Lack of due diligence

Lord Justice David Richards, Lord Justice Phillips, and Sir Stephen Richards upheld those findings in the judgment handed down on August 28.

Through a lack of diligence, Grant Thornton missed widespread misconduct and dishonesty by senior management figures at AssetCo, which used to run London’s fire engines, as the company continued to pay dividends despite major trading losses. 

AssetCo’s deliberately misstated assets and cashflow went undetected, and Grant Thornton later admitted it should have spotted that the business was unsustainable, rather than giving the firm a clean bill of health. Directors had embezzled funds, conducted fraudulent transactions and forged documents to dupe the auditor.

The result of Grant Thornton’s’ negligence meant the firm’s assets were overstated by £120m, and it allowed AssetCo to continue as a going concern when in fact it was insolvent. 

When the truth emerged, the scandal wiped £266m from AssetCo’s balance sheet, causing a share price collapse from 60p to less than 2p as the firm almost went under. Its entire fleet of fire engines was sold for £2 after a refinancing deal was reached following talks with creditors.

“Professional scepticism”

A later probe by the Financial Reporting Council found an “inflated” balance sheet and “fictitious revenue” in AssetCo’s financial statements. It severely reprimanded Grant Thornton and retired partner Robert Napper for a lack of “professional scepticism”. The firm was fined £2.3m, amongst other sanctions, including a £130,000 fine and a three-year ban for Napper.

“We note the Court of Appeal’s decision and the partial success of our appeal in reducing the award of damages,” a spokesperson for Grant Thornton said. “We acknowledged several years ago that the work in question, which was done in 2009 and 2010, fell short of the standards expected of us.”

The firm said the quality of its audits is a key priority and it would continue to invest significantly to ensure its audits deliver the necessary quality standards.

It can appeal a final time and take the case to the Supreme Court, but did not state whether a decision had been taken.

“Scope of the auditor’s duty”

One of the defences used by Grant Thornton was that “it does not fall within the scope of the auditor’s duty to assume responsibility for general trading losses, or for general business decisions or the fraud or imprudence of management”.

However, AssetCo paid out dividends that should not have been awarded if the books had been inspected properly, the court said, rejecting the argument and potentially opening the door for other companies to sue their auditors for losses that incur from business decisions taken following a botched audit.

The fallout could have huge ramifications for the wider audit sector, and for the challenger firm itself which has overseen a series of accounting flubs in recent years. It failed to spot alleged fraud at bakery chain Patisserie Valerie and at Greek mobile technology firm Globo. 

In 2018, Grant Thornton was fined £3m for “widespread and serious inadequacies” in its audits of drinks-maker Nichols and the University of Salford, and was fined £1.95m in July for a failed audit of Conviviality, a retailer of alcoholic drinks.

Replies (6)

Please login or register to join the discussion.

avatar
By thomas34
02nd Sep 2020 14:04

They'll soon recover the £22M through increased fee rates and carry on until the next botched audit. If they think they're not responsible for spotting fraudulent activity then who is?

In the meantime their regulatory body will hound the sole practitioner who forgets to cross the "T"s and dot the "I"s in a sweet shop audit.

Thanks (6)
Replying to thomas34:
avatar
By raju m
04th Sep 2020 11:48

All big firms are the same. Juniors spend hours at clients and fill the forms. seniors and partners tick the forms and send the bills.

Thanks (1)
Replying to raju m:
Hallerud at Easter
By DJKL
04th Sep 2020 15:50

And plan surely?

Thanks (0)
Replying to thomas34:
Hallerud at Easter
By DJKL
04th Sep 2020 15:50

thomas34 wrote:

If they think they're not responsible for spotting fraudulent activity then who is?

.

The directors by putting in place appropriate controls and possibly internal audit, perhaps.

Whilst no doubt there have been developments since I stopped auditing in the 1990s, do Kingston Cotton Mills, Hedley Byrne etc not still permit the Watchdog not Bloodhound approach that we all learned so carefully for Auditing 1 with ICAS ( Or I presume similar with ICAEW) I even remember the textbook by David Hatherly (He actually was an ICAS lecturer in Audit in the 1980s) detailing same and my learning the cases.

https://www.amazon.com/Audit-Evidence-Process-David-Hatherly/dp/09065011...

Thanks (0)
Replying to DJKL:
avatar
By thomas34
05th Sep 2020 08:51

Agreed up to a point DJKL and I too was brought up on the "Watchdog not a Bloodhound" approach in the 1960s. But someone has to protect the shareholders from the directors who in this case were the culprits.

Thanks (1)
Replying to thomas34:
Hallerud at Easter
By DJKL
07th Sep 2020 17:04

That is a board governance issue, surely that is what one's non execs are for.

Thanks (0)