AQI 2018: Grant Thornton told to work on auditor independence issues

Grant Thornton needs to address some independence and ethics issues, and increase management challenge in areas involving judgement according to the firm’s annual quality inspection (AQI) report, but the Financial Reporting Council (FRC) noted ‘some improvement’ on the previous year’s findings and more instances of good practice

The FRC examined eight audits in total, with six found to require no more than limited improvement.  However, the remaining two were both assessed as requiring significant improvement, with the regulator unhappy about the extent of challenge of management in relation to areas involving judgement, and the consideration of independence and ethics matters.

While the firm had made progress in revising its policies and procedures in response to the revised ethical and auditing standards, the FRC said Grant Thornton  needs to do more to its  systems and procedures in certain areas, including non-audit services approvals and the monitoring of personal financial interests.

The review found that the firm’s non-audit service approval systems did not require audit partner approval before teams were able to charge their time or sufficient information to be provided in relation to threats and safeguards arising. On one audit, the firm did not identify that the non-audit service was prohibited in the following year under the revised ethical standard, and subsequently decided to resign from the audit.

Systems and processes relating to prohibited financial interests were not compliant in certain areas with the revised ethical standard, particularly in relation to the expanded definition of ‘partners’, while the sample of partners subjected to compliance testing relating to prohibited investments was judged to be low.

The FRC also found monitoring of partner and staff rotation needed improvements, and said Grant Thornton had not developed a sufficiently formalised process to monitor compliance with audit firm rotation requirements for its PIE audits. This resulted in an audit client seeking and obtaining the FRC’s permission to extend the firm’s audit appointment beyond the maximum duration.

Although there were examples of robust management challenge, the FRC noted a number of instances where it felt this remained insufficient. They included insufficient evidence that the audit team appropriately assessed the risk of management bias in relation to segmental disclosures on one audit, and a lack of scepticism following a request not to confirm financial details directly with one of the group’s banks. On other audits, the firm was judged to have failed to challenge management over the appropriateness of discount rates and impairment valuations.

Overall, the FRC said Grant Thornton needs to improve the audit of accounting policies and disclosures; strengthen the effectiveness of the audit of revenue; provide more accurate descriptions of the audit procedures performed in the audit report; and assess  the quality of audits reviewed.

On the issue of audit procedures, the FRC reviewed audit reports on five of the audits and identified issues on three of them, including incorrectly stating that two areas of focus were significant risks and implying that the testing of revenue IT general controls concluded that they were operating effectively, which was not the case.

The regulator also highlighted the need for more effective communication with audit committees, finding eight areas within three audits where the audit findings were not adequately communicated.  On one audit there was insufficient time between the final audit committee meeting and the audit report being signed to allow for all outstanding matters to be satisfactorily resolved, and no evidence of subsequent communications relating to a significant taxation risk and a key legal disclosure that had not been satisfactorily addressed.

The FRC identified a number of examples of good practice in its assessments, which included Grant Thornton asking the directors of an audited entity to delay publication of the accounts to allow more time for the audit team to obtain sufficient and appropriate evidence relating to going concern, which the regulator said was particularly noteworthy given that the company’s shares were suspended as a result of missing their reporting deadline and non-compliance with the listing rules.

The FRC also found robust challenge of management on three audits in areas of higher risk, and said the firm has implemented mandatory consultation and special teams to address enhanced requirements in the revised auditing standards in relation to group audits.

Grant Thornton response

In its response to the FRC’s overall findings, Grant Thornton stated: ‘The FRC has acknowledged the improvements that we have made within the ethics function during the period under review. We take independence and ethics very seriously and we have invested time and resource to get it right. ‘We are continuing to improve our processes and procedures to meet our regulatory requirements; automation is playing a big part in this to make it as easy as possible for our people to get things right first time.

‘We are improving our monitoring and reporting and have tightened up the consequences of non-compliance. The firm continues to work with the Grant Thornton International Limited network to update our audit methodology and software with implementation of our new approach scheduled for autumn 2018. A key focus of the programme is the delivery of high quality audits.

‘We have already taken action to address many of the points raised in this report and remain committed to ongoing improvement.’

FRC’s AQI 2018 for Grant Thornton

Report by Pat Sweet

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