AQI 2019: Grant Thornton’s auditing branded ‘unacceptable’

The Financial Reporting Council (FRC) has labelled Grant Thornton’s audit quality as ‘unacceptable’, citing its failure to improve as a ‘deep concern’ after finding a quarter (26%) of all audits assessed over the past five years have required significant improvements, reports Pat Sweet

In this year’s audit quality inspection (AQI) reports, the FRC casts doubts on the firm’s plans to raise the standard of its work, markedly higher than any other firm over the period.

The regulator’s review is highly critical of Grant Thornton’s new LEAP audit platform, designed to address acknowledged shortcomings in audit quality, saying it does not consider the plan is ‘sufficiently developed or detailed to deliver the firm’s objectives’.

The review states: ‘The new LEAP audit platform may lead to some improvements. We do not believe, however, that the firm will achieve the required step change in quality without additional governance changes and rapid introduction of new quality control processes.’

As a result, the FRC says it will increase the number of GT audits to be inspected for 2019/20 by 25% (from eight to ten) and closely monitor the implementation of the firm’s quality improvement plan along with details of how it will monitor the success of quality initiatives over both the short and longer term.

In March 2018, Grant Thornton announced that it had made a strategic decision to cease tendering for audits of FTSE 350 entities, but the FRC pointed out it continues to audit a significant number of public interest entities (PIEs) within the scope of its inspections.

The FRC said: ‘The firm has in recent years accepted a number of higher-risk audit appointments. Our review findings for some of these audits raise questions over whether the firm has the present capacity and capabilities to audit such entities to an appropriate standard.’

AQI findings

This year the regulator assessed four out of eight GT audits as requiring more than limited improvements, double the findings of last year (two of eight in 2017/18).

Ten of the 39 audits reviewed over the past five years have been judged as requiring significant improvements, with the FRC stating that ‘this level of audit quality is unacceptable’.  It says urgent action is needed in order to make significant improvements.

In particular, the FRC says Grant Thornton needs urgently to improve the extent and rigour of challenge of management in areas of judgement, as well as the consistency of audit teams’ application of professional scepticism.

The review found instances of inadequate or insufficient challenge on two audits, in relation to the inventory provision models used by management, and the cashflows and growth assumptions used in management’s impairment assessments. There was also a lack of rigour regarding the valuation of pension liabilities and assets, and management’s assumptions used to calculate onerous lease provisions.

In addition, hedge effectiveness testing was inadequate, while the discount rate used in an impairment assessment was assessed with no involvement of valuation specialists. There were also failures to challenge the potential impairment of loss-making cash generating units and the potential provision for losses due to delays on a loss-making contract.

Instances of insufficient professional scepticism included the failure to corroborate explanations received from management regarding whether certain commercial arrangement transactions should have been disclosed.

There was a lack of professional scepticism in relation to overseas bank balances where no third-party bank confirmations were received, including one case where there had been a continued failure to obtain confirmations, resulting in insufficient alternative procedures being performed.

In other instances, the FRC found insufficient testing of manual revenue adjustments and high-risk journals made by management, to respond to identified fraud risks, as well as inadequate consideration of contradictory evidence in assessing the value of an unquoted investment.

Revenue testing

The FRC review also requires Grant Thornton to strengthen the effectiveness of the audit of revenue and improve both the audit of going concern and the audit of the completeness and evaluation of prior year adjustments.

Its assessment found that on one audit, insufficient testing was performed to conclude on the occurrence of website revenue (20% of group revenue). In particular, no audit procedures were undertaken to test the completeness and accuracy of the transfer of sales data between operational and accounting systems and also to assess the reliability of bank-related entries.

There was also insufficient evidence obtained over cash handling controls where the testing had been limited to the last two weeks of the year, with no justification of how this approach provided sufficient audit evidence that controls over revenue completeness had operated effectively throughout the year. There was an example of inadequate procedures to assess the reliability of source data used to test revenue occurrence, where records for testing were selected from a population that excluded approximately 80% of customers.

As regards auditing of going concern issues, the FRC found that on one audit, the Grant Thornton team performed insufficient procedures over the models supporting management’s going concern assessment. The audit team did not explain how they concluded on the integrity and accuracy of the inputs to the cash flow model or perform an arithmetical check of the model’s mechanics.

On the same audit there was also insufficient consideration of the need to include a ‘material uncertainty related to going concern’ paragraph in the auditor’s report in respect of events and conditions that might cast doubt on the group’s ability to continue as a going concern. On the other audit, the audit team did not sufficiently evidence their consideration of a potential condition that might cast doubt over going concern and the viability assessment.

On two audits, the review process found insufficient audit evidence over the completeness of correcting adjustments arising from accounting misstatements, including the assessment of whether the cumulative errors were material, as well as insufficient testing of a known prior period adjustment and inaccurate reporting to the audit committee of the required adjustment.

Grant Thornton response

After the AQI reports were published, a spokesperson for Grant Thornton told Accountancy Daily: ‘This FRC report makes clear that the entire profession must improve the quality of its work and Grant Thornton is no exception.

‘Some of our past audits for large listed firms have fallen short of the standards we expect.

‘We have proactively responded by taking significant steps to strengthen audit as a specialist practice.

‘In June 2019, we published details of a range of major investments in our structures and our people and we are working closely with the FRC in developing and implementing that plan. We have already started to take the FRC through the detail of this plan and will continue to do so in more detail in the coming months.

‘Furthermore, we are commissioning an independent review later this year which will help identify further important areas for improvement.’

The regulator will give Grant Thornton some time to stabilise its audit practice, particularly in light of the recent change of leadership, but it will be watching developments very closely to ensure no repetition of major audit failures.

In its published response to the FRC’s findings, Grant Thornton said: ‘We are disappointed that the focus we have given to audit quality in previous years has not resulted in the improvement we hoped for.

‘As such, as detailed in our audit improvement plan (AIP) which we started to develop in late 2018, we are now embarking on a root and branch change programme to ensure that our 2021 report meets the FRC target of audits being at a standard of good (or with limited improvements).

‘We are committed to this as a goal and are working closely with the FRC to achieve this.’

Grant Thornton also stated: ‘The AIP will transform our approach to ensure all of our audit work will demonstrate consistent high quality in future. The current leadership of the firm is wholly committed to achieving this objective.’

The AIP has a number of elements, including the appointment of a head of audit, and a  new audit quality board with powers to hold the leadership of the firm to account if it believes audit quality is not receiving appropriate investment, and that lessons from inspections are not being addressed. The firm is also creating two initial centres of excellence for the most complex audit work in London and Birmingham. An aspiration that by 2021 engagement leads, managers and their in-charges will dedicate 80% of their work exclusively to these complex cases.

GT has also stated it is commissioning an independent assessment of audit at Grant Thornton as an audit firm to be led by a senior individual with no previous connection with the firm.

In its response, the firm said: ‘The delivery of the AIP means our people will have the time to stand back, exercise professional scepticism and challenge management more consistently, two areas identified by the FRC where the firm needs to make improvements to deliver a quality audit.

‘During summer 2019 we will review our engagement with those companies we audit on a case by case basis.

‘If our focus on quality requires us to consider whether to resign from certain audit engagements, we will not hesitate to do so.’

Report by Pat Sweet

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