Problems are mounting for Grant Thornton after retailer Sports Direct blamed the auditor for a delay in the publication of its annual accounts.
Grant Thornton’s 2018 audit of Mike Ashley’s company was one of several recently savaged by the Financial Reporting Council as unsatisfactory, and now the 2019 accounts have been pushed back amid the mauling the auditing sector by the regulator.
Sports Direct said the accounts, due July 18, would be produced sometime before August 23, days before the four-month reporting deadline for quoted companies, as the auditor needs more time to work on the numbers.
In a statement, Sports Direct said the increased regulatory scrutiny of auditors and audits, including the review by the FRC of its historic filings, was a major factor in the delay.
Industry expert Prem Sikka, Emeritus Professor of Accounting at the University of Essex, said Grant Thornton’s current public exposure may be a factor in the delay.
“They may be feeling that further reputational damage could be on the way if they hurry this,” he told AccountingWEB. “Also, there is a school of thought that Sports Direct do not want the announcement of the accounts overshadowed by the regulator should it decide to fine Grant Thornton; it may be a case of simply moving the results as not to get wrapped in with that.”
Sports Direct has indicated it will be the last time it engages Grant Thornton, and it is seeking to replace the firm that has scrutinised its books for the last decade.
Whatever the problems in its relationship with Grant Thornton, some commentators believe Mike Ashley’s firm may also be seeking to deflect from its own shortcomings; the firm has unsuccessfully tried to woo new auditors and already has been knocked back by three of the Big Four.
The delay announcement was also accompanied by a statement that it is likely to miss profit forecasts amid uncertainty over the performance of House of Fraser, which sent investors fleeing.
“The complexities of the integration into the company of the House of Fraser business and the current uncertainty as to the future trading performance of this business,” the retailer said.
The company said it understood its accounts and their audit were at “an advanced stage. However, there are a number of key areas to conclude on which could materially affect the guidance given in Sports Direct’s announcement of 13 December 2018.”
“Sports Direct, a highly successful FTSE250 firm, also brings with it the unconventional management style of Mike Ashley, and has a habit of attracting drama,” said a forensic accountant at a Big Four firm speaking anonymously. “Grant Thornton are in a bit of a pickle with this one and are ‘damned if they do, damned if they don’t’. Everyone is being cautious at the moment, and for good reason, the whole sector is on trial.”
The FRC’s annual audit inspections recently found that along with Grant Thornton, EY, KPMG, Deloitte and PwC, and challengers BDO, and Mazars had all failed to hit the quality target for their FTSE 350 audit work.
“It seems to me that if the big audit firms and indeed the 'entire profession' are all falling short, then there is something more fundamental here and there needs to be a rethink and some honesty about the purpose and limitations of audit,” said Jonathan Griffey FCCA CTA and partner at Hacket Griffey.
“The usual knee-jerk response of piling on more regulation just means that there are more boxes to tick, more forms to fill in, and less time to do any actual auditing, so more corners are cut. And at the same time audits firms are expected to compete for business,” said Griffey.
The FRC’s findings were particularly damning for Grant Thornton, which is struggling to repair its reputation following a hat-trick of major accounting debacles.
It audited Patisserie Valerie, since accused of cooking books along with pastries; outsourcing firm Interserve, now in administration; and stock-picker Woodford Patient Capital Trust, which is also flirting with collapse following a trading suspension and soaring debts.
According to the FRC, only 50% of reviewed Grant Thornton audits were judged “good or required limited improvements”, compared to 75% last year. In the last five years, just 26% of the firm’s reviewed audits have required “significant improvement”.
As a result, Grant Thornton has been placed in special measures and will undergo enhanced scrutiny, and the firm will be forced to draw up a new audit quality improvement plan and up the number of audits to inspect in 2019/20.
“What we need, and not being addressed in the current debate, is more transparency in the audit process,” said Sikka. “We need more sunlight; sunlight is a good antidote to bad practice.”
He said information about individual audit processes including questions asked by the auditor, which staff are used, what the budget is, and the time taken, should all be made public.
“We can’t ask auditors these kinds of questions; why, what they have done, they have always obstructed it; it’s a recurring problem,” said Sikka.
Grant Thornton declined to offer comment when approached.