Grant Thornton fined for Interserve audit failingsby
Grant Thornton has been hit with a severe reprimand and a £700,000 fine by the accounting watchdog after failures in the audit of the global construction and support services firm Interserve.
Only six weeks after getting a £2.5m fine for its audit of Patisserie Valerie, Britain’s sixth largest accountancy firm is once again facing a financial sanction from the Financial Reporting Council (FRC).
Grant Thornton has been fined £718,250 - reduced down from £1.3m - and severely reprimanded after the FRC found there were serious evidence and scepticism failings by the auditors in the audit of Interserve.
Simon Lowe, the then senior statutory auditor on the audit engagement, was also reprimanded by the FRC and fined £70,000, which was then reduced to £38,675. Lowe is now a consultant at the firm after leaving the audit side of the business in 2018. The Interserve FY17 was his last audit following a 43-year career in the profession.
The regulator noted that the accountancy firm and Lowe provided “exceptional co-operation” in the investigation and made early admissions.
Claudia Mortimore, deputy executive counsel to the FRC, said: “This is a proportionate package of sanctions in respect of failings over three consecutive audit years. It reflects on one hand the seriousness of certain evidence and scepticism failures in FY 2015 and FY 2016, while recognising that the adverse findings were limited to discrete areas of large audits.”
Interserve, which was a high-profile business with a number of public-sector clients, collapsed into admission on 15 March 2019. But in the financial year 2017, the outsourcing outfit was riding high with a reported total revenue of £3.2bn and a profit before tax of £244.4m with 55,350 people employed worldwide.
Due to the number of public-sector clients, the FRC said there was “significant public interest” in the audit conducted.
The regulator flagged adverse findings in the audit work on the forward loss provisions in the financial statements for FY 2015 and FY 2016 against a contract for the construction of a waste treatment facility in Glasgow.
FRC said in the final notice that the contracts had been identified as a “significant risk in the audit plan” and the estimated losses in the Glasgow contract were substantial.
“The audit evidence obtained by Grant Thornton did not adequately support key judgments and accounting estimates made by the [Interserve]. In some instances, the evidence was absent; in others it was of poor quality; in others the evidence directly pointed against recognition of certain amounts by the [Interserve].”
The regulator also raised a red flag around the audit team’s assessment of the company as a going concern and goodwill impairment in the financial statements for FY 2017, after having been identified, at planning stage, as areas of significant risk for the audit.
The FRC did not assert that any of the breaches resulted in the financial statements being materially misstated and the breaches were limited to discrete areas of the audit.
The final notice made efforts to praise Lowe and Grant Thornton for their exceptional level of cooperation and how they have demonstrated contrition and have apologised for the breaches.
Alongside the financial sanctions, Grant Thornton must also report to the FRC on its monitoring programme of the quality of audit work on loss-making contracts.
However, the final notice notes that the firm has already introduced a formal policy relating to use of experts on going concern and has developed a loss-making contract methodology with an on-going monitoring programme.
The last time Grant Thornton crossed paths with the FRC it was chastised for “a serious lack of competence” in the audit of failed bakery Patisserie Valerie. The large accountancy firm is also awaiting the outcome of the ongoing Sports Direct investigation.
Grant Thornton comments
A Grant Thornton spokesperson told AccountingWEB: “Having co-operated fully with the FRC throughout the course of its investigation into our audits relating to 2015-2017, we are pleased to now conclude this matter.
“Whilst we acknowledge the regulator’s findings that certain limited aspects of our work were below expectations in this instance, it’s important to note that the findings did not assert that the company’s accounts were materially misstated in respect of these matters.
“We have invested significantly in our audit practice since the period in question, to drive consistently high quality and are now seeing the positive outcome of this investment – evidenced most recently in our latest AQR scores.”