Grant Thornton fined £1.95m for Conviviality audit flaws
Grant Thornton was fined £1.95m by the Financial Reporting Council this week and reprimanded along with two of its Conviviality audit team for technical and ethical failures in the audit of the failed drinks group.
At the heart of the disciplinary sanction were 11 adverse findings demonstrating Grant Thornton’s failure to “take responsibility for establishing a control environment that placed adherence to ethical principles and compliance with ethical standards above commercial considerations”.
The disciplinary action attracted a £3m penalty that was reduced by 35% to £1.95 for co-operating with the investigation.
Kevin Engel, the former Grant Thornton partner who handled the Conviviality engagement for the year to 30 April 2014, also received a severe reprimand and a permanent ban on from signing audit opinions.
Senior manager Natasha Toy was initially part of the Grant Thornton audit team at Conviviality but was then seconded to help the client prepare its year-end financial statements - contrary to audit independence standards.
The senior manager subsequently tried to remove a 4.5 hour time entry she had recorded on the audit file to her involvement. She earned a reprimand for this breach but was spared any further financial penalty or costs.
The year 2014 was Conviviality’s first year as a plc listed on the AIM exchange. When the company’s financial controller left, the finance director reacted keenly when Engel suggested that his audit manager could help “front and back” and with the year-end close.
This was a contravention of Paragraph 160 of Ethical Standard 5 that forbids audit firms from providing accounting services to a listed audit client unless specific criteria are met in emergency situations.
In its commentary on the case, the FRC highlighted two aspects of Grant Thornton’s failings:
- Deficiencies in the firm’s control environment and processes to ensure compliance with ethical standards; and
- Ethical breaches that compromised the independence of its Conviviality audit.
“The FRC does not allege that Grant Thornton in fact lacked objectivity or that the accounts did not give a true and fair view of the company’s affairs,” the watchdog said. But it nevertheless obtained an admission from the firm that it had breached standards designed to preserve the integrity, objectivity and independence of its audit work over a period of three years and providing an unqualified audit opinion in circumstances where it should have resigned from the engagement because of the audit manager’s secondment.
The disciplinary sanctions included several non-financial elements including the creation of an internal ethics oversight board that will have to report to the FRC for the next three years; increased training for staff on “relevant ethical issues” and other measures to ensure compliance with ethical standards.
“The sanctions in this matter not only send a clear message as to how seriously the FRC views such failures but are also focused on ensuring that there is no repetition and the causes of the failures are effectively addressed at their roots,” said FRC deputy executive counsel Claudia Mortimore.
The six-year-old disciplinary action ultimately came about after Conviviality collapsed in March 2018, following a £15m readjustment to forecast earnings. This included more than £5m the company said was the result of a “spreadsheet arithmetic error”. Days later, the company revealed it hadn’t budgeted for a £30m tax bill that fell due.
Conviviality’s share value fell 60% before AIM suspended trading and shortly afterwards its wholesale division was bought by the owners of Magners cider in a pre-pack administration.
KPMG took over from Grant Thornton as Conviviality auditor for the year to 30 April 2017 and its conduct is also the subject of an FRC investigation that has yet to be concluded.
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