Grant Thornton UK fined $1.6M for Sports Direct audit mistakes
The Financial Reporting Council (FRC) penalised Grant Thornton UK a total of about 1.3 million pounds ($1.6 million) for failing to offer reasonable assurance during two separate audits of retailer Sports Direct International.
The company was fined £1,130,500 (US$1.36 million) for inadequacies in its Sports Direct audit for fiscal year 2016 and £193,375 (US$222,000) for violations in 2018. According to a news statement issued by the FRC on Monday, the penalty were lowered from £1.7 million ($2 million) and £350,000 ($420,000) for "substantial" cooperation, early admissions, and corrective efforts previously implemented.
Grant Thornton also committed to report to the FRC on modifications to its audit process for audit team judgements, audit of inventory provisions of retail businesses, and use of audit data analytics to audit revenue. The company received a harsh reprimand and must disclose that its 2016 and 2018 audits did not comply with applicable standards.
Former Grant Thornton partner Philip Westerman was also reprimanded and fined £63,000 (US $76,000) and £16,575 (US $20,000) for inadequacies in his 2016 and 2018 work, respectively.
The specifics: In addition to servicing clients online, Sports Direct, a part of Frasers Group, runs more than 700 brick-and-mortar locations. Since 2007, Grant Thornton has audited the store, and since 2014, Westerman has served as statutory auditor for the engagement.
During the 2016 audit, the question of whether an unknown delivery firm could be designated a linked party to Sports Direct was at issue. "[Although] the respondents recognised related parties as a key risk area, they failed to evaluate management's allegation that Delivery Company A was not a related party of [Sports Direct] with professional suspicion," the FRC noted. A variety of pertinent elements should have motivated respondents to evaluate and pursue topics further, but they did not.
The regulator faulted Grant Thornton and Westerman for failing to obtain sufficient audit evidence regarding the matter, failing to evaluate the relationship between Sports Direct and the delivery company, and failing to communicate that related parties had been identified as a significant risk area.
During the 2018 audit, Grant Thornton and Westerman were presented with Sports Direct's disclosures of a £162.2 million (US $195 million) inventory provision and the fact that internet sales were the company's second-largest revenue source that year. The auditors were unable to gather adequate proof on the dependability of the data.
The FRC stated that its examination was limited to Grant Thornton's actions during the audits and not Sports Direct's disclosures. The chief counsel for the regulator did not "argue that any of the respondents' violations resulted in significantly misstated financial statements for either 2016 or 2018."
In the announcement, FRC Deputy Executive Counsel Jamie Symington stated, "It is particularly vital that auditors follow up with due diligence where they have identified possible related party transactions as a substantial audit risk." "Auditors must adopt a professional sceptical mentality and employ sound judgement based on sufficient and appropriately recorded information."
A representative for Grant Thornton said in an emailed statement, "We are glad to complete these long-running disputes, which date back to 2016." "Having invested considerably in the quality of our audits since then, we have witnessed a notable improvement in our outcomes, and we are convinced that the shortcomings discovered by the FRC's investigations, albeit confined to discrete sections of the audits, do not represent the work we perform today.
"Today's news represents the conclusion of many FRC investigations that have been public knowledge for some time,"
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