Sanctions against Grant Thornton UK LLP and Philip Westerman
News types: Investigations
Published: 18 July 2022
The Executive Counsel of the Financial Reporting Council (“FRC”) has issued Final Decision Notices under the Audit Enforcement Procedure (the “AEP”) and imposed sanctions against Grant Thornton UK LLP (“GT”) and Philip Westerman (“Mr Westerman”), formerly a partner of GT (together, the “Respondents”), in relation to their statutory audits of the financial statements of Sports Direct International plc (“SDI”) [1] for the financial years ended 24 April 2016 (the “2016 Audit”) and 29 April 2018 (the “2018 Audit”).
Under the AEP, the Executive Counsel is concerned only with the conduct of the Respondents. Reference is made to SDI and Sportsdirect.com Retail Limited (“SDR”) to explain the context of the findings and sanctions against the Respondents. Executive Counsel makes no finding about SDI or SDR, or anyone else, other than the Respondents.
The Final Decision Notices explain the failings in the Respondents’ audit work, which are summarised in this announcement. They do not, and this announcement does not, make any finding as to whether the 2016 and 2018 financial statements failed to provide a true and fair view and / or contained material misstatements. In particular, Executive Counsel does not make a finding as to whether there was in fact a related party transaction.
SDI is a well-known high street retailer and listed on the main market of the London Stock Exchange.
The following sanctions have been imposed against GT:
- Financial Sanctions, comprising:
- In respect of the 2016 Audit a financial sanction of £1,700,000, adjusted for mitigating factors and admissions/early disposal to £1,130,500; and
- In respect of the 2018 Audit a financial sanction of £350,000, adjusted for aggravating and mitigating factors and admissions/early disposal to £193,375.
- Non-Financial Sanctions, comprising:
- In respect of the 2016 Audit, a requirement for GT to report to the FRC on whether changes made to its audit methodology are resulting in a better exercise and documentation of an audit team’s judgement regarding key audit matters;
- In respect of the 2018 Audit, a requirement for GT to undertake thematic reviews and report to the FRC as to the efficacy of enhancements it has introduced regarding the audit of inventory provisions of retail entities and the use of audit data analytics to audit revenue;
- A severe reprimand in respect of both the 2016 & 2018 Audits; and
- A declaration that that the Statutory Audit Report for 2016 & 2018 did not satisfy the Relevant Requirements.
The following sanctions have been imposed against Mr Westerman:
- Financial Sanctions, comprising:
- In respect of the 2016 Audit, a financial sanction of £90,000, adjusted for admissions/early disposal to £63,000; and
- In respect of the 2018 Audit, a financial sanction of £30,000, adjusted for aggravating and mitigating factors and admissions/early disposal to £16,575.
- Non-Financial Sanctions, comprising:
- A severe reprimand in respect of both the 2016 & 2018 Audits.
The Adverse Findings against each Respondent, admitted at an early stage, concern basic and important requirements which are designed to ensure the quality and effectiveness of an audit; they are fundamental to the work of an auditor. As a result of the adverse findings, both the 2016 & 2018 Audits failed in their principal objective of providing reasonable assurance that the 2016 & 2018 financial statements were free from material misstatement.
In respect of the 2016 Audit, there were serious failings by the Respondents in the conduct of the audit concerning their assessment as to whether SDI’s financial statements contained the necessary disclosures to draw attention to the possibility that its financial position may have been affected by its relationship with Delivery Company A.
- Whilst the Respondents identified related parties as an area of significant risk, they failed to treat with professional scepticism management’s assertion that Delivery Company A was not a related party of SDI. There were a number of relevant factors which should have prompted the Respondents to consider and follow up matters further, but they did not.
- The Respondents should have obtained audit evidence commensurate with the level of risk, but the evidence obtained was insufficient for the Respondents to reach a reasonable conclusion as to the appropriateness of the related parties disclosure.
- The Respondents failed to evaluate whether the overall presentation of the relationship between SDI and Delivery Company A in the financial statements met reporting requirements. In so far as the Respondents did consider these issues, they failed to document their consideration, conclusions, and audit evidence.
- Even though related parties had been identified as a significant risk, the Respondents also failed adequately to communicate this to those charged with governance before the 2016 financial statements were finalised.
In respect of the 2018 Audit, there were failures in the Respondents' audit work relating to two specific areas of the audit: (1) inventory provisions; and (2) website sales revenue.
- The inventory provision in 2018 was £162.2m and an increase on the previous audit year. It was a highly material amount. Website sales was the second largest area of revenue for SDI in 2018, accounting for 20% of total revenue. The Respondents identified that both were areas of significant risk in the 2018 Audit.
- The Respondents failed to obtain sufficient appropriate audit evidence, evaluate whether information provided by SDI was sufficiently reliable, or to prepare sufficient audit documentation commensurate with the risk in relation to these two areas of the audit.
Executive Counsel does not assert that any of the Respondents' breaches resulted in the financial statements for either 2016 or 2018 being materially misstated. The Respondents' breaches were limited to discrete areas of each audit.
Executive Counsel acknowledges that the Respondents have provided significant co-operation and made early admissions in relation to both the 2016 & 2018 Audits. GT has taken remedial action to prevent similar breaches in the future and will report to the FRC on these as part of the non-financial sanctions imposed.
Jamie Symington, Deputy Executive Counsel to the FRC, said:
“The audit failings in this case were serious and relate to fundamental auditing standards. It is particularly important that auditors follow up with due rigour where they have identified potential related party transactions as a significant audit risk. Auditors must adopt a mindset of professional scepticism, and exercise good judgment based on sufficient and properly documented evidence. The package of financial and non-financial sanctions imposed by the FRC on the auditors in this case will help to drive improvements at the firm and the wider industry.”
Final Decision Notice in respect of the 2016 Audit
Final Decision Notice in respect of the 2018 Audit
[1] Now known as Frasers Group Plc