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31st Jul '18 by Bonitabeach

6 comments 3254 reads

Closure of investigation into Grant Thornton UK’s audits of Globo Plc

30 July 2018

The Financial Reporting Council (FRC) today announces the closure of its investigation into the conduct of Grant Thornton UK LLP (GTUK) in relation to the audits of the consolidated financial statements of Globo Plc (Globo) for the years ended 31 December 2013 and 31 December 2014. Globo was a mobile technology developer with shares traded on AIM which conducted most of its business operations via overseas subsidiaries in Greece and Cyprus. GTUK was responsible for the audit of the Group financial statements and instructed component auditors in Greece and Cyprus. The FRC’s investigation under the Accountancy Scheme (the Scheme) commenced in December 2015, one month after Globo had gone into administration. The investigation focused on the matters within the jurisdiction of the Scheme i.e. GTUK’s group audit and specifically, its direction, supervision and performance of the group audit engagement. This included GTUK’s evaluation of the sufficiency and appropriateness of the audit evidence obtained by component auditors to express an opinion on the group financial statements. At the conclusion of the investigation, and in accordance with the provisions of the Scheme, the Executive Counsel considered whether there was a realistic prospect that a Tribunal would make a finding of Misconduct. Misconduct means an act or omission or series of acts or omissions which falls significantly short of the standards reasonably to be expected of an auditor. The test which would be applied by a Tribunal is whether the conduct is more than negligence and must cross the threshold of real seriousness. Following consideration of all the relevant evidence gathered during the investigation, the requirements of ISA 600 (Audits of Group Financial Statements), ISA 220 (Quality control for an Audit of Financial Statements) and ISA 240 (The Auditor’s Responsibilities Relating to Fraud) and the opinion of an independent expert, the Executive Counsel concluded that there was no realistic prospect of a finding of Misconduct. This matter will, therefore, be closed without further action.

Notes to editors: The FRC’s mission is to promote transparency and integrity in business; just in case you thought we were in the chocolate teapot business.

You pay for their "professional expertise" but don't expect anything in return.

Bonitabeach

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ls2g08

31st Jul '18

Absurd given a short seller using google street view worked out it was a fraud.

I have always thought companies should pay a fixed licence type fee to a central body and then an auditor appointed by this body to audit the company. Any auditor who doesn't come up to scratch is struck off the panel.

JakNife

The specific issue though is that Grant Thornton only audited the UK plc accounts and the fraud was in the Greek subsidiary. What responsibility is Grant Thornton supposed to have in those circumstances to question the Greek auditor? Perhaps they did query them and had their questions resolved appropriately?

It is a relatively common arrangement where one auditor might be appointed to the PLC and also be responsible for auditing a large number of the subsidiaries. However, the worldwide group might have different auditors in different countries.

There is also the issue that Grant Thornton UK LLP might have amazing standards but its audit partner in, say, Guatemala, might have different standards.

Flackwell

Only audited the Group plc accounts? Not true

They also had to evaluate the audit evidence gathered overseas etc

To me this effectively confirms that an audit ain't worth the paper its printed on - Let's save the fees going forward eh?

peterg

I can see your point Jak, and I'd guess that was the view of the FRC. However:

GTUK was responsible for the audit of the Group financial statements and instructed component auditors in Greece and Cyprus.

If main auditors can effectively not take responsibility for the audits of subsidiaries that they instruct, then the system is wide open to abuse, and means that no audit of a company with geographically spread subsidiaries can be trusted. I would not suggest that GT knew the local audits were apparently next to worthless, and clearly the FRC has decided it would not be likely it could be proved to be so. But quite clearly a ruling like this appears to allow an auditor to create a situation where a non regulated auditor was used to deliberately mislead on the state of key subsidiaries.

Solutions are either for investors to spend the time investigating the nature of the company structure and audit structure - and run a mile if in doubt, or for the group auditor to be made to take responsibility for the work of those they instruct to do local work.

Peter

gus 1065

Raises (again) the issue of whether an auditor is a “watch dog” or a “bloodhound”. Are they expected to bark only if they see something where they are told to look that seems odd (a verification role) or sleuths using their experience to sniff out anything in the audited group of companies that is suspicious and investigate it? Seems to be a big gap in expectations between what the auditors undertake to provide based on a number of assumptions (not least that the company they audit gives them true and full disclosure of information they can rely on) and what stakeholders such as private shareholders would like such as independent confirmation that the audited company isn’t crooked.

This report seems to say that GT probably weren’t negligent to the point of Misconduct as watch dogs (who depended in turn on other watch dogs in other jurisdictions) but fell well short as bloodhounds in detecting the fraud identified by the likes of Paul Scott, Tom Winnifrith and others. In my limited experience, the bloodhound approach would require a full forensic audit by specialists which is time consuming and expensive (and in most cases unnecessary) which is invariably the last resort only once the fraud horse has bolted (and shareholders are already sc***ed). In my opinion, a clean audit is a necessary but by no means sufficient basis on which to make an investment.

Monkeys and peanuts spring to mind.

Gus.

JohnEustace

3rd Aug '18

But Gus it was a really obvious fraud. Any breed of dog should have smelt it. I spotted it by myself as an even more complete amateur than I am now, and made my views clear on Simon Thompson’s IC comment threads before and after the fact.
The issue perhaps is that the auditors are lap dogs rather than watch dogs or bloodhounds.

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