Grant Thornton has been handed financial sanctions of over £1.3m for Sports Direct, now Frasers Group, audit failings.
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 (GT), as well as Philip Westerman, formerly a partner of GT, in relation to their statutory audits of the financial statements of Sports Direct International plc for the financial years ended 24 April 2016 (the 2016 Audit) and 29 April 2018 (the 2018 Audit).
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, has been imposed against GT.
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, has been imposed against GT.
Non-financial sanctions comprise, 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, there is 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.
Mr Westerman meanwhile has been handed financial sanctions in respect of the 2016 Audit 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.
The FRC noted that the adverse findings against GT and Mr Westerman, 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.
The FRC said that in respect of the 2016 Audit, there were serious failings in the conduct of the audit as to whether Sports Direct’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’.
With the 2018 Audit, there were failures in audit work relating to two specific areas of the audit: inventory provisions and 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 Sports Direct in 2018, accounting for 20% of total revenue. GT and Mr Westerman identified that both were areas of significant risk in the 2018 Audit.
The FRC said GT and Mr Westerman failed to obtain sufficient appropriate audit evidence, evaluate whether information provided by Sports Direct was sufficiently reliable, or to prepare sufficient audit documentation commensurate with the risk in relation to these two areas of the audit.
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.”
