Grant Thornton has been fined £3m for “firm-wide failures” to comply with ethical standards between 2014 and 2017, as regulatory scrutiny increases on the Big Four.
The auditor failed to meet ethical standards between 2014 and 2017, the Financial Reporting Council (FRC) said today. And the accounting giant also failed to ensure its audit of an alcohol retailer was independently undertaken for the year ending April 2014.
The FRC handed severe reprimands to Grant Thornton, one of its partners and a senior manager over audit failings concerning Conviviality Retail.
The FRC said Grant Thornton breached “very important standards” designed to uphold the integrity, objectivity and independence of audits.
And the watchdog accused the auditor of repeating these failures for three years, resulting in “numerous breaches” of ethical standards by partners and staff.
Audit engagement partner Kevin Engel received a severe reprimand and a ban from signing audit opinions after he arranged for a senior manager initially assigned to Conviviality Retail’s audit to help prepare the firm’s financial statements.
“The threats to independence created by this situation were so great that the Audit Engagement Partner should not have provided an audit opinion, and in signing an unqualified audit opinion confirming compliance with all relevant standards as he in fact did, he breached a number of standards designed to preserve the independence and objectivity of audit,” the FRC said.
That senior manager, Natasha Toy, also received a severe reprimand. The FRC found that she tried to remove evidence of her involvement in both the audit and financial statements, under instruction from Engel.
“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,” deputy executive counsel Claudia Mortimore said.
“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.”
Grant Thornton will pay £1.95m rather than the full £3m fine after admitting to its failures.
The penalty comes after the FRC announced plans to make the Big Four accountants ring-fence their audit units in a bid to improve independence.
Under the proposal, Grant Thornton, PwC, KPMG and Deloitte must separate their audit and non-audit businesses by 2024.
The FRC hopes this will ensure audits “do not rely on persistent cross subsidy from the rest of the firm”.
However, experts have slammed the plan as inadequate, pushing for structural change where the firms are restricted to conducting audits. That would prevent them from taking on more lucrative work with the same clients, which critics fear could lead to conflicts of interest.
A spokesperson for Grant Thornton said:
We acknowledge the regulator’s findings and although we are disappointed with the outcome, we are pleased to have now concluded this historic matter, relating back to 2014 – 2017. Whilst we accept there were previously shortcomings in our processes and procedures at the time, we are confident that such a situation should not arise again, owing to the significant improvements and investments we’ve made in the years since the period to which these findings relate. These include investing in our people and resources to better ensure consistent quality, revising the structure of our ethics function to enable it to better support the firm, and increased levels of training throughout the firm on compliance with the ethical standard.