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Grant Thornton fined £1.3m over Sports Direct audit failings

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Serious audit failings over two financial years at Sports Direct has cost Grant Thornton two fines totalling over £1.3m and a severe reprimand.

 

18th Jul 2022
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Grant Thornton and former audit partner Philip Westerman received two hefty fines from the accounting regulator following “serious” audit failings for Sports Direct International plc in the financial years 2016 and 2018. 

Announced today by the Financial Reporting Council (FRC), the 2016 audit centred on Grant Thornton’s failure to treat with professional scepticism a relationship between Sports Direct International and a company owned by the brother of Mike Ashley, the CEO of the retail giant. 

The sixth largest audit firm in the UK was fined £1,700,000 for the 2016 audit, reduced to £1,190,000 for admissions and early payment, and £350,000 for the 2018 audit, discounted to £193,375. 

Westerman, who has 17 years’ auditing experience and had been the auditor for Sports Direct International since 2014, was also severely reprimanded for both audits and received a fine of £90,000 for the 2016 audit, adjusted to £63,000, and £30,000 for the 2018 audit, reduced to £16,575. 

“The audit failings in this case were serious and relate to fundamental auditing standards. It is particularly important that auditors follow up with due rigour where they have identified potential related party transactions as a significant audit risk,” said Jamie Symington, deputy executive counsel to the FRC.

“Auditors must adopt a mindset of professional scepticism, and exercise good judgment based on sufficient and properly documented evidence. The package of financial and non-financial sanctions imposed by the FRC on the auditors in this case will help to drive improvements at the firm and the wider industry.”

2016 audit failings

The FRC described the 2016 audit failings as “serious” and containing breaches in professional scepticism, obtaining sufficient audit evidence, and documentation of professional judgment. 

The issue at the centre of the 2016 audit was Sports Direct International’s relationship with “Delivery Company A”. 

Sports Direct International restructured its online retail sales in February 2015 to account for VAT of goods to non-business customers within the EU and to ensure it didn’t have to register for VAT in EU member states. 

As part of this restructuring, Sports Direct International changed the way delivery services were offered to non-UK EU non-business customers and entered into a contract with Delivery Company A. 

The final notice refers once in the 31-page document to “Barlin” as the related company, a company owned by John Ashley, the brother of Sports Direct CEO Mike Ashley. 

After the 2015 audit, Grant Thornton said “disclosure of these transactions will need to be made next year” and Westerman “raised a flag”. 

The final notice also explained how Grant Thornton’s audit team were also told by its tax team that the restructured arrangements “would be weakened if a related party was appointed to [Delivery Company A’s] board”. The tax team also described the tax arrangements as being “at risk of challenge in most member states. The tax at stake is significant”. 

But despite the relationship being identified as a significant risk, Grant Thornton failed to treat with professional scepticism the management’s assertion that Company A was not a related party of Sports Direct International. 

A note prepared by Grant Thornton, which the final notice said must have been prepared after the Audit Findings Report, said: “We have obtained sufficient evidence, but note that [Delivery Company A] (a company of which [Member 1 of Sports Direct International Senior Management Team]’s brother is a director) is not considered a related party by the client and has not been disclosed.”

2018 audit failings

Grant Thornton was also pulled up over the 2018 audit failings around inventory provisions and website sales revenue. 

Sports Direct International’s inventory provision was £162.2m, and was highly material, while the website sales for FY2018 made up £679m. Grant Thornton identified both areas as a significant audit risk. 

In both cases, the regulator found that the Grant Thornton audit team failed to obtain sufficient appropriate audit evidence.

The regulator concluded that Grant Thornton failed to provide reasonable assurance that the 2016 and 2018 financial statements were free from material misstatement.

A spokesperson for Grant Thornton UK LLP said: “We are pleased to now conclude these long-running matters, which date back to 2016. Having invested significantly in the quality of our audits since this time, we have seen a marked improvement in our results and are confident that the issues identified by the FRC’s investigations, while limited to discrete areas of the audits, are not reflective of the work we produce today. 

“Today’s announcement marks the final outcome of legacy FRC investigations, all of which have been in the public domain for some time.” 

New auditor 

At the time of the FY2018 Audit, Grant Thornton had acted as auditor to Sports Direct International continuously since the high street retailer’s listing in February 2007. But Grant Thornton quit in 2019 after an unexpected £614m Belgian tax bill due to the VAT charges on goods moved within the EU. 

Grant Thornton throwing in the towel sparked a scramble from Sports Direct to find a new auditor, with RSM picking up the role after the Big Four refused to take Mike Ashley’s retail giant on. Sports Direct is also entangled in another dispute with Deloitte over a tax structure adopted on the guidance of the Big Four firm.

Replies (6)

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By Hugo Fair
18th Jul 2022 20:39

So where's the Audit Failures league table we've requested?
You could even have an annual A.F. Cup if the frequency doesn't let up!

Thanks (5)
Replying to Hugo Fair:
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By Hugo Fair
18th Jul 2022 20:45

Also shouldn't the fine be doubled every time a 'spokesperson' uses any of the following phrases:
* We have "invested significantly in the quality of our audits since this time";
* "we have seen a marked improvement";
* "we are confident that the issues are not reflective of the work we produce today".
It's yah-boo posturing that only equates to 'move along, nothing to see here'.

Thanks (4)
Replying to Hugo Fair:
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By Paul Crowley
19th Jul 2022 16:04

If the spokesperson just spouts rhetoric then better and more concise not to quote but to state the number of the standard excuse/comment, and the number of times this excuse has been used in the last 12 months

Thanks (3)
Replying to Paul Crowley:
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By Hugo Fair
19th Jul 2022 18:07

Great idea ... evolution in progress ... hope that Aweb's watching?

Thanks (3)
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By JustAnotherUser
19th Jul 2022 08:15

"We are pleased to now conclude these long-running matters, which date back to 2016."

Change to...

"we are pleased these things take so long, they caught us here but due to the obscene time it takes the FRC to do anything we will continue to skirt the law, bend and break the rules and absorb any fines into the cost of doing business. I mean just look at accountingweb, its a new fine every day for someone"

Thanks (2)
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By mkowl
20th Jul 2022 09:24

I assist a client in their dealings with the UK auditor, preparing the stat accounts etc. This year there is a tenacious audit senior, which is no bad thing aside from the fact of his apparent arrogant attitude, clearly he hasn't yet attended the soft skills course. But once he has worked on that side and accept that he could be wrong, then perhaps more of said type are needed in the profession. My overriding memory of formative years were the nodding dogs that produced a lovely file were more favourably received than the ones that caused the managers to actually do work

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