Grant Thornton fined more than £700,000 over audit failures

The UK accounting authority penalised Grant Thornton more than £700,000 for audit errors at Interserve, a former FTSE 250 outsourcer that went bankrupt in 2019.

The Financial Reporting Council has slapped a second fine against Grant Thornton in just over a month, this time for £1.3 million for “extraordinary co-operation.”

At the end of September, the regulator fined the firm £2.3 million for a “severe lack of competence” in the firm’s audits of café chain Patisserie Valerie, which also went bankrupt.

The regulator penalised Simon Lowe, the Grant Thornton partner who supervised the audits, more than £38,000 — down from £70,000 — and reprimanded him. Lowe retired as a partner at Grant Thornton, the UK’s sixth-largest accounting company, in June 2018 after 43 years in the industry. He remains a consultant at Grant Thornton.

Grant Thornton was also ordered to pay £467,000 in investigative expenses and to report to the FRC every two years on the quality of its audit work on lossmaking contracts.

When its lenders took control of Interserve through a prepack administration in March 2019, just 14 months after another outsourcer Carillion went bankrupt, the company had annual revenues of £3.2 billion and employed roughly 55,000 employees.

The majority of its revenue came from UK government contracts, such as probation services and the construction of schools, hospitals, and workplaces.

The FRC stated that the audit of Interserve’s financial statements was of “great public interest” due to the company’s size and nature of operation.

“This is a reasonable set of punishments for shortcomings in three consecutive audit years,” Claudia Mortimore, the FRC’s deputy executive counsel, said. The punishments reflected the seriousness of the audit flaws, but they also acknowledged that the issues “were isolated to distinct regions of major audits,” she explained.

Significant loss provisions deriving from contracts linked to waste treatment facilities in Glasgow were included in Interserve’s reports for the financial years ended in 2015 and 2016.

The FRC found that the auditors did not acquire enough information to support the company’s provisioning calculations and assumptions that losses would be recoverable under a “pain share clause” in its contract, from a subcontractor, or from its insurance.

They also failed to express sufficient scepticism about how the corporation arrived at its estimates, according to the report.

The regulator also chastised Grant Thornton’s evaluation of the firm as a continuing concern and the impairment of goodwill in the accounts for the 2017 financial year, both of which had been recognised as serious risk areas.

Interserve’s financial statements were not materially misstated as a result of the audit breaches, according to the FRC.

Interserve’s administrators at EY took the unprecedented step of enabling the FRC to conduct its investigation using Interserve’s legally privileged files. To keep the substance of the documents secret, the watchdog simply issued a summary of its conclusions.

“While we acknowledge the regulator’s conclusions that certain restricted areas of our work in this instance fell short of expectations, it’s important to note that the findings did not imply that the company’s accounts were significantly misstated in these matters,” Grant Thornton said.

“We have invested significantly in our audit practise since the period in question in order to drive consistently high quality and are now witnessing the good results of this investment,” it added, citing the regulator’s most recent audit quality scores.

Grant Thornton is still being investigated for its audits of Sports Direct.