Financial regulator fines Grant Thornton £2.3m over audit
The Financial Reporting Council has fined Grant Thornton £2.3m after the accounting firm admitted to serious failings including a lack of “professional scepticism” when it audited a company that used to run London’s fire engines.
Grant Thornton UK (GT) and Robert Napper, a retired audit partner at the firm, admitted misconduct and agreed to fines and other sanctions, the UK’s audit and accounting regulator said.
Napper has been excluded from membership of the ICAEW accountancy institute.
The fine and “severe reprimand” is for GT’s audit of the financial statements of AssetCo for the financial years ended 31 March 2009 and 31 March 2010.
Napper, who had 23 years’ experience at the time of the misconduct, was GT’s audit engagement partner.
Grant Thornton and Napper's audit failings
The audit failings included an “inflated” balance sheet and “fictitious revenue” in AssetCo’s financial statements.
The company almost collapsed in 2011 and sold its UK business for just £2.
AssetCo was refinanced after reaching a deal with creditors in 2011.
GT and Napper admitted that their failings were due to significant and widespread lack of professional competence and due care in the performance of the audits including, failure to keep track of tasks and resolve outstanding queries, “flawed judgments” and “insufficient appreciation” of audit risks, the FRC said.
It also said that the respondents accepted that the root cause of many of the defects in their audit work was a “significant failing” in the professional scepticism.
“This misconduct is rightly reflected in the seriousness of the sanctions, such as the exclusion of Mr Napper from membership of the ICAEW and the fines on both respondents,” said Gareth Rees QC, executive counsel to the FRC. “These sanctions will send a strong signal to the audit profession of the importance of upholding high standards of conduct.”
12 allegations against GT and Napper
The FRC’s executive counsel brought a total of 12 allegations against GT and Napper, including:
Disclosures in respect of related party transactions and restricted cash.
- Existence of significant amounts of finance lease debtors and related revenue, and measurement of substantial assets including investments in subsidiaries, goodwill and other intangible assets.
- Assessment of the going concern assumption in the financial statements.
- Failures to apply sufficient professional scepticism in relation to a variety of matters material to the financial statements.
The failings in the audit were particularly serious because AssetCo was publicly listed on AIM and attracted substantial investment from the public.
In its 2008 annual report, AssetCo said that its market capitalisation was about £140m. Its share price in 2009 (about £6) reflected financial statements which contained an “inflated” balance sheet and included some “significant revenue” which was fictitious.
The company’s share price fell to £1 by 31 March 2011.
Some of the failings in GT’s audit were “material” and “highly substantial”, although the misconduct was not “dishonest, deliberate or reckless”, the FRC also said.
Auditors should 'maintain a questioning mind'
Steve Collings, audit and technical partner at Leavitt Walmsley Associates Ltd and a regular contributor to AccountingWEB, said that regulatory bodies and professional bodies are keen to ensure that auditors maintain a questioning mind, particularly for subjective areas such as accounting estimates and management bias.
“The [GT audit] failings noted by the FRC's investigation are very serious, as reflected in the levels of sanctions against the firm and the audit engagement partner concerned,” Collings said. “Nowadays it is more important than ever to ensure that professional scepticism is maintained throughout the entire audit and to ensure the entire audit team has a thorough understanding of the audit client, its processes, and business environment as well as the risks associated with the client.”
AssetCo is suing GT over what it alleges were “negligent audits” that led to a crisis in its business.
Grant Thornton resigned as AssetCo’s auditor in 2011 and was replaced by PwC.
In a statement given to AccountingWEB on Wednesday, Grant Thornton said: “We have fully co-operated with the FRC throughout the investigations and regret these failings. Our audit quality processes have evolved significantly since these audits were performed in 2009 and 2010 and we are determined in our efforts to ensure our work is of the highest quality. Given the FRC’s ongoing proceedings against three former executives of AssetCo, in which the FRC alleges, amongst other things, that they acted dishonestly or recklessly, we are unable to comment further.”