REG - Financial RepCouncil - Sanctions against Grant Thornton UK LLP

FrasersAnnouncement

18/07/2022 09:45

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RNS Number : 7859S  Financial Reporting Council  18 July 2022

Sanctions against Grant Thornton UK LLP and Philip Westerman

          18 July 2022

The Executive Counsel of the Financial Reporting Council ("FRC") has issued
Final Decision Notices under the Audit Enforcement Procedure (the "AEP") and
imposed sanctions against Grant Thornton UK LLP ("GT") and Philip Westerman
("Mr Westerman"), formerly a partner of GT (together, the "Respondents"), in
relation to their statutory audits of the financial statements of Sports
Direct International plc ("SDI") 1  for the financial years ended 24 April
2016 (the "2016 Audit") and 29 April 2018 (the "2018 Audit").

Under the AEP, the Executive Counsel is concerned only with the conduct of the
Respondents. Reference is made to SDI and Sportsdirect.com Retail Limited
("SDR") to explain the context of the findings and sanctions against the
Respondents. Executive Counsel makes no finding about SDI or SDR, or anyone
else, other than the Respondents.

The Final Decision Notices explain the failings in the Respondents' audit
work, which are summarised in this announcement. They do not, and this
announcement does not, make any finding as to whether the 2016 and 2018
financial statements failed to provide a true and fair view and / or contained
material misstatements. In particular, Executive Counsel does not make a
finding as to whether there was in fact a related party transaction.

SDI is a well-known high street retailer and listed on the main market of the
London Stock Exchange.

The following sanctions have been imposed against GT:

1.   Financial Sanctions, comprising:

·    In respect of the 2016 Audit a financial sanction of £1,700,000,
adjusted for mitigating factors and admissions/early disposal to £1,130,500;
and

·    In respect of the 2018 Audit a financial sanction of £350,000,
adjusted for aggravating and mitigating factors and admissions/early disposal
to £193,375.

2.   Non-Financial Sanctions, comprising:

·    In respect of the 2016 Audit, a requirement for GT to report to the
FRC on whether changes made to its audit methodology are resulting in a better
exercise and documentation of an audit team's judgement regarding key audit
matters;

·    In respect of the 2018 Audit, a requirement for GT to undertake
thematic reviews and report to the FRC as to the efficacy of enhancements it
has introduced regarding the audit of inventory provisions of retail entities
and the use of audit data analytics to audit revenue;

·    A severe reprimand in respect of both the 2016 & 2018 Audits; and

·    A declaration that that the Statutory Audit Report for 2016 &
2018 did not satisfy the Relevant Requirements.

The following sanctions have been imposed against Mr Westerman:

1.   Financial Sanctions, comprising:

·    In respect of the 2016 Audit, a financial sanction of £90,000,
adjusted for admissions/early disposal to £63,000; and

·    In respect of the 2018 Audit, a financial sanction of £30,000,
adjusted for aggravating and mitigating factors and admissions/early disposal
to £16,575.

2.   Non-Financial Sanctions, comprising:

·    A severe reprimand in respect of both the 2016 & 2018 Audits.

The Adverse Findings against each Respondent, admitted at an early stage,
concern basic and important requirements which are designed to ensure the
quality and effectiveness of an audit; they are fundamental to the work of an
auditor. As a result of the adverse findings, both the 2016 & 2018 Audits
failed in their principal objective of providing reasonable assurance that the
2016 & 2018 financial statements were free from material misstatement.

In respect of the 2016 Audit, there were serious failings by the Respondents
in the conduct of the audit concerning their assessment as to whether SDI's
financial statements contained the necessary disclosures to draw attention to
the possibility that its financial position may have been affected by its
relationship with Delivery Company A.

·    Whilst the Respondents identified related parties as an area of
significant risk, they failed to treat with professional scepticism
management's assertion that Delivery Company A was not a related party of SDI.
There were a number of relevant factors which should have prompted the
Respondents to consider and follow up matters further, but they did not.

·    The Respondents should have obtained audit evidence commensurate with
the level of risk, but the evidence obtained was insufficient for the
Respondents to reach a reasonable conclusion as to the appropriateness of the
related parties disclosure.

·    The Respondents failed to evaluate whether the overall presentation
of the relationship between SDI and Delivery Company A in the financial
statements met reporting requirements. In so far as the Respondents did
consider these issues, they failed to document their consideration,
conclusions, and audit evidence.

·    Even though related parties had been identified as a significant
risk, the Respondents also failed adequately to communicate this to those
charged with governance before the 2016 financial statements were finalised.

In respect of the 2018 Audit, there were failures in the Respondents' audit
work relating to two specific areas of the audit: (1) inventory provisions;
and (2) website sales revenue.

·    The inventory provision in 2018 was £162.2m and an increase on the
previous audit year. It was a highly material amount. Website sales was the
second largest area of revenue for SDI in 2018, accounting for 20% of total
revenue. The Respondents identified that both were areas of significant risk
in the 2018 Audit.

·    The Respondents failed to obtain sufficient appropriate audit
evidence, evaluate whether information provided by SDI was sufficiently
reliable, or to prepare sufficient audit documentation commensurate with the
risk in relation to these two areas of the audit.

Executive Counsel does not assert that any of the Respondents' breaches
resulted in the financial statements for either 2016 or 2018 being materially
misstated. The Respondents' breaches were limited to discrete areas of each
audit.

Executive Counsel acknowledges that the Respondents have provided significant
co-operation and made early admissions in relation to both the 2016 & 2018
Audits. GT has taken remedial action to prevent similar breaches in the future
and will report to the FRC on these as part of the non-financial sanctions
imposed.

Jamie Symington, Deputy Executive Counsel to the FRC, said:

"The audit failings in this case were serious and relate to fundamental
auditing standards. It is particularly important that auditors follow up with
due rigour where they have identified potential related party transactions as
a significant audit risk. Auditors must adopt a mindset of professional
scepticism, and exercise good judgment based on sufficient and properly
documented evidence. The package of financial and non-financial sanctions
imposed by the FRC on the auditors in this case will help to drive
improvements at the firm and the wider industry."

The Final Decision Notice in respect of the 2016 Audit is available here
(http://www.frc.org.uk/document-library/enforcement/2022/final-decision-notice-grant-thornton-2016-audit-of)
.

The Final Decision Notice in respect of the 2018 Audit is available here
(http://www.frc.org.uk/document-library/enforcement/2022/final-decision-notice-grant-thornton-2018-audit-of)
.

Notes to editors:

1.         The FRC's purpose is to serve the public interest by
setting high standards of corporate governance, reporting and audit and by
holding to account those responsible for delivering them. The FRC sets the UK
Corporate Governance and Stewardship Codes and UK standards for accounting and
actuarial work; monitors and takes action to promote the quality of corporate
reporting; and operates independent enforcement arrangements for accountants
and actuaries. As the competent authority for audit in the UK the FRC sets
auditing and ethical standards and monitors and enforces audit quality.

2.         Past FRC Enforcement Outcomes
(https://www.frc.org.uk/getattachment/bf5523d7-1329-4b58-8d13-091e8ee7cc74/Enforcement-sanctions-imposed-against-Audit-firms-and-Audit-partners-03-09-2021.pdf)
can be found here.

3.         To meet its responsibility as the competent authority in
respect of audit enforcement, the FRC operates the Audit Enforcement Procedure
(https://www.frc.org.uk/getattachment/26e687a9-05a1-47bd-861d-497b22678c24/FRC-Audit-Enforcement-Procedure_January-2022.pdf)
. This procedure applies to the investigation and sanctioning of breaches of
the various requirements of the statutory auditors of Public Interest Entities
(PIEs) and any other cases retained by the FRC including AIM companies with a
market capitalisation in excess of €200m. The procedure also applies to
matters that have been reclaimed from a Regulatory Supervisory Body by the
FRC.

Investigations are usually conducted by Executive Counsel and the Enforcement
division. The FRC's Conduct Committee may direct that the investigation is
delegated to a Recognised Supervisory Body (RSB) which will provide an
investigation report to the Executive Counsel so that (s)he may decide whether
to issue a Decision Notice.

4.         All media enquiries should be directed to the FRC
communications team:

·    Kate O'Neill, Director of Stakeholder Engagement and Corporate
Affairs, on telephone 07714415229 or email: k.oneill@frc.org.uk.

·    William Boyack, Communications Manager, on telephone: 020 7492 2307/
07480 210166 or email: w.boyack@frc.org.uk.

·    Adam Mohamed, Communications Manager, on telephone 07920874687 or
email: a.mohamed@frc.org.uk

 

5.         If you no longer wish to receive press releases from the
FRC please email unsubscribe@frc.org.uk.

 1  Now known as Frasers Group Plc

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