FRC announces sanctions against Grant Thornton UK LLP

News types: Investigations

Published: 8 July 2020

The Financial Reporting Council (FRC) has fined Grant Thornton UK LLP (Grant Thornton) £3 million (discounted to £1.95 million for admissions and early disposal) for: (i) firm-wide failures to ensure compliance with ethical standards and requirements between 2014 and 2017 and (ii) the loss of independence in relation to its audit of Conviviality Retail Plc (the Company) for the year ending 30 April 2014 (the Audit).
Grant Thornton has also agreed to the following non-financial sanctions:

  • A Severe Reprimand;
  • A declaration that the Audit did not comply with Relevant Requirements; and
  • A package of measures directed at improving the quality of future audits, comprising: (1) the establishment of an Ethics Board to oversee the firm’s compliance with Ethical Standards and requirements with the Board to provide reports to the FRC for three years; (2) a review of its Ethics Function to identify any skills/resource gaps; (3) increased training to staff on relevant ethical issues; and (4) further improvement to the firm’s policies and procedures to ensure compliance with ethical standards and requirements.

Grant Thornton will also pay a sum of £207,000 in respect of Executive Counsel’s costs in the matter.
The breaches in this case fall into two main categories:

  1. Deficiencies in the firm’s control environment and policies and procedures designed to ensure compliance with ethical standards and requirements.

Grant Thornton have admitted breaching very important standards designed to preserve the integrity, objectivity and independence of audit. The firm failed to take responsibility for ensuring an appropriate control environment that placed adherence to ethical principles and compliance with ethical standards and requirements above commercial considerations.  In particular, its policies and procedures designed to ensure compliance were defective, as well as being inadequately implemented and monitored; it failed adequately to resource its Ethics team; and it did not have an appropriate enforcement regime whereby individual breaches of Ethical Standards were identified. The failures were repeated and prolonged (over a course of three years) and resulted in numerous breaches of ethical standards and requirements by the firm’s partners and staff.

  1. Breaches of Ethical Standards which resulted in loss of independence in relation to the Audit

Grant Thornton seconded a senior manager who had performed limited work on the Audit to assist in the preparation of the Company’s accounts, in breach of relevant Ethical Standards.  Grant Thornton completed the Audit and provided an unqualified audit opinion to the Company in circumstances where the threats to independence raised by the secondment were such that the firm should not have provided an audit opinion but rather should have resigned from the engagement. The FRC does not allege that Grant Thonton in fact lacked objectivity or that the accounts did not give a true and fair view of the Company’s affairs.

The Executive Counsel recognises that Grant Thornton has taken the matters identified in this investigation seriously and has acknowledged its failings, and that the firm has recently been undertaking remedial action in order to address these issues.  It is also acknowledged that Grant Thornton has provided a good level of cooperation during the investigation.

Claudia Mortimore, Deputy Executive Counsel, said:

It is vital that audit firms comply with ethical standards and requirements and create the necessary culture and control environment so that their people really understand their importance.  In this case, there were firm-wide failures over a number of years which not only led to numerous breaches of such requirements on individual audits but also the real risk of more such breaches which have not been, and will never be, reported or identified.  The sanctions in this matter not only send a clear message as to how seriously the FRC views such failures but are also focused on ensuring that there is no repetition and the causes of the failures are effectively addressed at their roots.

  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.
  1. Past FRC Enforcement Outcomes can be found here.
  1. To meet its responsibility as the competent authority in respect of audit enforcement, the FRC operates the Audit Enforcement Procedure. 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.

In brief, the stages of the Audit Enforcement Procedure are:

  • Initial case examination and decision to investigate
  • Investigation
  • Decision by Executive Counsel as to whether to issue a Decision Notice (a notice with the findings and recommended sanction);
  • Referral to Enforcement Committee and decision by the Enforcement Committee whether to issue a Decision Notice; and
  • Referral to a Tribunal
  • In order for a matter to be referred for investigation by the FRC’s Executive Counsel under the Audit Enforcement Procedure, the FRC’s Conduct Committee is required to decide whether there is good reason to investigate an Allegation in relation to a Statutory Auditor and/or a Statutory Audit Firm.

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.

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