Grant Thornton partner earnings hit £513k as audit profits collapse

After a troubled period including the sudden departure of CEO Sacha Romanovitch, multimillion pound regulatory fines for audit failures and a six-month deferral of their accounts, mid-tier Grant Thornton, ranked sixth in the Accountancy Daily Top 75 Firms, has reported a rise in fee income to £514m and hike in partner profitability after a torrid set of numbers the previous year

Fee income for the year rose from £502m to £514m, up 2.4%, with a double figure 11% jump in overall profitability to £68m, up £7m for the year end to 31 December 2019, stating the results reflected ‘a period of structural change and investment’.

Audit profitability took a battering over the 18-month period, but partner profitability returned to pre-2018 levels, lending weight to the argument that audit is a lost leader at some audit firms, including Grant Thornton.

The average profit per partner calculated in accordance with IFRS for the period ended 31 December 2019 was £566,000, compared to £373,000 the previous year, and the average profit allocated to each partner rose to £513,000 compared to £336,000 for year end December 2018 [under adjusted accounts].

The turnover for the firm’s statutory audit reportable segment was reported as £187.5m for the 18-month period to December 2019, with operating profit put at £1m. That contrasted with a £132.4m turnover for the year ending 30 June 2018 and operating profit of £13.5m.

The firm’s decision to refuse to tender for any listed entity FTSE audits back in March 2018 has ripped out the profit margins from the audit service line. 

Grant Thornton has also flagged that it is facing a further major audit investigation by the regulator, the Financial Reporting Council (FRC), details of which have not yet been disclosed as ‘not in the public interest’, an FRC spokesperson said.

According to the annual report, audit operating profit was calculated after charging direct costs (eg, employment costs) on an actual basis and allocating other overheads (eg, property costs, IT costs) pro rata based on headcount or fees/turnover attributable to the reportable segment. Members’ remuneration has not been charged in arriving at the operating profit.

The decision to move the year end was taken in the midst of an overhaul of the firm’s leadership with the appointment of CEO David Dunckley in November 2018 to replace the ousted Romanovich.

Grant Thornton announced it was going to change its accounting period date from 30 June to 31 December, arguing that the seasonality of much of its work made this easier to manage the business, given around 70% of annual profits are generated in the six months to 30 June.

As a result, the financials were presented on an 18-month to end December 2019 and a comparative basis against the previous year end of June 2018 in the firm’s annual report. 

Despite the fallout from its share of audits, Grant Thornton reported ‘significant improvement’ across the other parts of the business with strong growth in its advisory services and tax, while it its non-listed audit business was holding up, but was hugely unprofitable.


Repeated FRC sanctions and fines for audit failures

The firm has been hit by a swathe of regulatory fines as well as legal actions over the reporting period. There are also a number of ongoing FRC investigations including the fallout for the collapse of cake shop chain, Patisserie Valerie. It also resigned the Sports Direct audit

The FRC fined GT £4m in a case relating to a lack of independence in the audits of Nichols and the University of Salford in June 2018, and levied a £650,000 fine for an unsatisfactory audit of an unnamed audit client at the end of last year.

In February 2019, Grant Thornton was ordered to pay £21m in damages to former client AssetCo after a High Court judge branded its auditing of the company ‘a flagrant breach of professional standards’, while in December it was slammed with a £650,000 fine over the audit of another unnamed listed UK company, where 'potential reputational damage' for the client company meant that the audit regulator, the FRC, came under pressure to not reveal the identity of the business involved. 

In last year's hugely influential FRC AQIs, Grant Thornton's audit of listed companies was described as unacceptable by the audit regulator.


Annual transparency report

Grant Thornton has also published its annual transparency report including an update on its audit investment plan announced during 2019 to further improve audit quality at the firm following a decline in quality noted by the results of the FRC’s annual quality reviews.

The report stated: ‘Whilst we have made significant progress in improving the quality of our most complex audits, we know that it will take some time for these improvements to be fully reflected in our annual reports from our regulator.’

In the transparency report Fiona Baldwin, head of audit, stated: ‘We continue to monitor the FTSE 350 market, specifically in the context of our decision to withdraw from tendering for future FTSE 350 audit appointments in 2018.

‘We continue to be regularly invited to participate in such tender processes and remain open to the prospect of returning to this market when conditions are right – namely when we are comfortable that our audit quality is consistently high and when our desire to see a more level playing field is satisfied.

‘We are also actively considering how the increasing dialogue around managed shared audits might be part of our re-entry into the FTSE 350 in the future.’

The report also admitted that Grant Thornton is currently subject to a number of ongoing FRC investigations, into the auditing of Sports Direct International, Patisserie Holdings, Interserve and what it described as another legacy ongoing investigation into audit failures at an unnamed listed entity that the FRC has not publicly announced yet.


Covid-19 response 

The firm also flagged uncertainty about the impact of the covid-19 outbreak on the business in the longer term, and said this had been considered as part of the group’s adoption of the going concern basis and it had  also delayed the signing off of the financial statements in order to model potential scenarios.

The annual report stated: ‘To date, we have not observed any material impact on our activities due to Covid-19 and, indeed, have continued to win significant pieces of work since the UK went into lockdown which are already being delivered remotely.

‘We have now been working fully remotely for three weeks with no issues identified across any of our teams and throughout our business aspects such as billing, cash collection, timesheets, client acceptance and continuance, management information and payments to our people and suppliers have been completed without issue.’

Last week Grant Thornton announced that it had asked staff to sign up for sabbaticals or shorter hours in a bid to stave off problems emanating from the covid-19 pandemic. This also occurred at the time of the 2008 financial crisis. Last autumn the firm also laid off a number of partners.

In the annual report, Dunckley stated that a small number of staff - around 150 of Grant Thornton’s 4,500 employees - had agreed to a temporary reduction in their contractual hours or a short-term sabbatical, which equates to a 40% pay reduction, but did not indicate whether the firm would use the government's state aid furlough programme to help it cope with the covid-19 pandemic.

When the plan to review staffing in light of the covid-19 pandemic was first announced last week, a spokesperson for Grant Thornton UK LLP said: ‘The coronavirus pandemic means all businesses, including our firm, are operating in unprecedented and uncertain times.

‘We know that this is a difficult time for many of our people, particularly those who have caring responsibilities.

‘We have offered all our employees the opportunity to volunteer for a temporary reduction in their contractual hours or a short-term sabbatical. These are clearly exceptional times and these voluntary measures help us to support our people while also continuing to support our clients.’

Grant Thornton refused to comment.

Report by Pat Sweet, Sara White


GT annual report and transparency report links

Grant Thornton annual report

Grant Thornton transparency report

2020-04-07 13:12:54 +0100

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