Grant Thornton scrambling for cover after Sports Direct audit delay

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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.

Reputational damage

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.”

General malaise

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.

Special measures

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.

About Mark Taylor

Mark Taylor
Mark Taylor is a financial services journalist specialising in legal and regulatory compliance, white collar crime and technology.

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By tedbuck
18th Jul 2019 12:14

Interesting that 3 firms have turned him down. What happens if the company is boycotted? Presumably the audit fee would just hit the ceiling or he would be unaudited.
If more auditors took a risk assessment on those clients likely to prove a disaster, most of the public works industry, for example - what would happen then?
Would HMG have to step in with a Government Backed Auditor to do all those jobs the profession wouldn't touch?
Judging by the levels of competence shown by HMRC and the FCA I should think the profession would have a good laugh.
We do live in interesting times don't we?

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By tom123
to tedbuck
18th Jul 2019 12:40

Wasn't it Huntingdon Life Sciences that needed to be audited by the national audit office?

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avatar
18th Jul 2019 15:32

I wouldn't want someone like that as a client, that's for sure.

It would be interesting if HMG/FCA took the audit on. We could all see what they charged and whether it was an audit of the quality they seek from others.

Personally, I think that is coming at the problem from the wrong end. I'd like to see businesses run so they are long-term sustainable - rather than loaded with debt, all historic value dividended out, then thrown to the liquidators in the first year that profits don't rise by another X% at the cost of millions in fees and thousands of job losses.

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18th Jul 2019 15:34

I chortled at this

“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."

On the basis that this is from the POV of a fixed audit fee, and fixed hours.

Surely the solution is to actually to some ruddy audit work. Which means more decent people on the job, for more time. So less of a margin for the partners.

The appalling structure of audits means you have got lots of bright young things - who know nothing about anything much ( I used to be one) - trying to find problems (or indeed told not to find any), and the seniors just wanting it signed off for the minimum amount of time and closing their eyes to any problems.

Those that progress ion audit, close their eyes and ears, get it signed off quickly. Those that do not progress find problems, take 'too long', and get in trouble for running over budget.

Time and time again audit failures about about not understanding the business, not being critical, and doing what management say, as they are paying for it.

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