Sanctions against Grant Thornton and a partner

News types:

Published: 1 November 2021

The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Decision Notice under the Audit Enforcement Procedure and imposed sanctions against Grant Thornton UK LLP (Grant Thornton) and Simon Lowe, Audit Engagement Partner (together, the Respondents), in relation to the statutory audits of the 2015-2017 financial statements of Interserve plc (in administration) (the Company).

The following sanctions have been imposed:

Grant Thornton:

1. A financial sanction of £1.3 million, adjusted for mitigating factors and admissions / early disposal to £718,250; and
2. Non-financial sanctions, comprising:
   1. a requirement for Grant Thornton to report to the FRC on its monitoring programme of the quality of audit work on loss-making contracts;
   2. a Severe Reprimand; and
   3. a declaration that the Statutory Audit Reports for the Audits did not satisfy the Relevant Requirements.

Mr Lowe:

1. A financial sanction of £70,000 adjusted for mitigating factors and admissions / early disposal to £38,675; and
2. Non-financial sanctions comprising:
   1. a Severe Reprimand; and
   2. a declaration that the Statutory Audit Reports for the Audits did not satisfy the Relevant Requirements.

The Adverse Findings against each of the Respondents (admitted at an early stage) concern the audit work performed on:

• a substantial loss provision in the financial statements for FY 2015 and FY 2016 against an ‘Energy from Waste’ contract for the construction of a waste treatment facility. There were serious evidence and scepticism failings by the auditors in respect of key judgements and accounting estimates relevant to the loss provision, an area identified as a significant risk in the audit; and
• aspects of the auditors’ assessments of going concern and goodwill impairment in the financial statements for FY 2017(both having been identified, at planning stage, as areas of significant risk for the audit), where work on elements of the analysis of management’s modelling of the financial data was inadequately performed or, in some respects, inadequately documented.

The Company, now in administration, was a large, high-profile business with a number of public-sector clients and there was a significant public interest in the audit conducted.

Executive Counsel does not assert that any of the breaches resulted in the financial statements being materially misstated and the breaches were limited to discrete areas of the audit.

Grant Thornton and Mr Lowe provided exceptional co-operation in the investigation, and made early admissions, and Grant Thornton has taken remedial actions to prevent similar breaches in the future.

This case is notable because certain evidence from Grant Thornton’s audit files relevant to the decision was disclosed to the FRC in confidence and remains subject to the legal professional privilege of the Company.  The administrators of the Company and Interserve Group Limited (a company which purchased the business of the Company from its administrators) agreed to the FRC’s use of privileged material for the limited purpose of this investigation and any subsequent enforcement proceedings.  As such full details of the Adverse Findings remain confidential and cannot be published.  For this reason, Executive Counsel’s decision has been published in summary form, without reference to the privileged material relevant to the decision.

Claudia Mortimore, Deputy Executive Counsel to the FRC, said:

“This is a proportionate package of sanctions in respect of failings over three consecutive audit years.  It reflects on one hand the seriousness of certain evidence and scepticism failures in FY 2015 and FY 2016, while recognizing that the Adverse Findings were limited to discrete areas of large audits.
 
We note the exceptional cooperation provided by the Respondents throughout the investigation and this has been reflected in the discount to the financial sanctions.  Some of the evidence relevant to this decision is legally privileged and we acknowledge the assistance provided by the administrators of the Company and Interserve Group Limited in agreeing that the material could be used in confidence for the limited purposes of our investigation and any subsequent enforcement proceedings.”

A link to the summary of the Final Decision Notice can be found here.