GT fined £3m over audit ethics failures

The Financial Reporting Council (FRC) has hit Grant Thornton UK with a £3m fine, discounted to £1.95m, over a series of ethical and independence failures in its auditing of Conviviality Retail, part of the collapsed alcohol wholesaler and retailer group

The sanctions relate to firm-wide failures to ensure compliance with ethical standards and requirements between 2014 and 2017, and the loss of independence in relation to its audit for the year ending 30 April 2014.

The regulator said the breaches fell into two main categories. Firstly, Grant Thornton failed to take responsibility for ensuring an appropriate control environment that placed adherence to ethical principles and compliance with ethical standards and requirements above commercial considerations. 

In particular, its policies and procedures designed to ensure compliance were defective, as well as being inadequately implemented and monitored; it failed adequately to resource its ethics team; and it did not have an appropriate enforcement regime whereby individual breaches of ethical standards were identified.

The FRC said these failures were repeated and prolonged (over a course of three years) and resulted in numerous breaches of ethical standards and requirements by the firm’s partners and staff.

Secondly, there was a loss of independence in relation to the 2014 audit, when Grant Thornton seconded a senior manager who had performed limited work on the Conviviality audit to assist in the preparation of the company’s accounts, in breach of relevant ethical standards. 

The FRC said Grant Thornton completed the audit and provided an unqualified audit opinion to the company in circumstances where the threats to independence raised by the secondment were such that the firm should not have provided an audit opinion but rather should have resigned from the engagement.

However, the FRC did not allege that Grant Thornton in fact lacked objectivity or that the accounts did not give a true and fair view of the company’s affairs.

As well as the fine, Grant Thornton will pay £207,000 in respect of the FRC’s costs and has agreed to a set of non-financial sanctions including a severe reprimand, a declaration that the audit did not comply with relevant requirements and a package of measures to improve the quality of future audits.

These measures include setting up an ethics board, which is to provide reports to the FRC for three years; a review of its ethics function to identify any skills/resource gaps; increased staff training on relevant ethical issues; and further improvement to the firm’s policies and procedures.

Audit partner

As part of this investigation, the FRC has issued a severe reprimand to Keven Engel, a former Grant Thornton audit engagement partner, in respect of the audit of Conviviality’s financial statements for the year ended 30 April 2014.

Engel has also been given a permanent prohibition banning him from signing audit opinions.

The regulator said Engel arranged for a senior manager, who was initially part of the team assigned to the audit, to be seconded to Conviviality to assist with the preparation of its year-end financial statements. 

The FRC said the threats to independence created by this situation were so great that the Engel 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.

In addition, Engel instructed the secondee to transfer a four-and-a-half-hour time entry originally recorded on the audit file in order to conceal evidence of her involvement in both the audit and subsequently the preparation of the company’s accounts, being aware of the threats to independence which those circumstances had created.

The former senior manager, Natasha Toy, was given a severe reprimand by the FRC, which it said took into account the fact she was acting under the instruction of the audit engagement partner in transferring the time and that she believed she was following his instruction in attempting to subsequently remove the entry. 

The FRC said it also recognised Toy’s hitherto unblemished disciplinary record, her genuine contrition for the misconduct and the exceptional level of cooperation she demonstrated during the course of the investigation.

The FRC said its sanctions on Engel took into account his exceptional level of co-operation during the course of the investigation, but also that he has been the subject of previous enforcement action by the FRC.

In August 2018 Engel was given a severe reprimand and a fine of £100,000 (discounted for settlement to £75,000) following an FRC investigation into a lack of independence in the audits of Nichols plc and the University of Salford, which saw Grant Thornton fined £4m for independence failings.

Reactions

Claudia Mortimore, FRC deputy executive counsel, said: ‘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. 

‘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.’

A spokesperson for Grant Thornton UK 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.’

Conviviality plc collapsed into administration in April 2018 having identified a ‘material error’ in its financial forecasts and an unexpected £30m tax bill earlier in the year.

In July 2018 the FRC announced an investigation, conducted under its audit enforcement procedure, to look at the audit by KPMG of the financial statements of Conviviality for the 52 weeks ended 30 April 2017.

The FRC has also commenced an investigation under the accountancy scheme into the preparation and approval of Conviviality’s financial statements and other financial information by a member of the ICAEW.

These investigations are ongoing.

Useful links

 

Grant Thornton final decision notice

Engel final decision notice

Toy settlement agreement

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