Grant Thornton has been fined £1.3m for “serious failings” in basic auditing of the sportswear retailer Sports Direct, the UK accounting regulator said on Monday.
The findings relate to Grant Thornton’s audits of Sports Direct International (SDI), now called Frasers Group, in 2016 and 2018 and the work of Philip Westerman, the partner in charge of the audits.
The Financial Reporting Council (FRC) severely reprimanded Grant Thornton, which had audited Sports Direct’s accounts since the retailer’s stock market float in 2007, and Westerman, who was handed an £80,000 fine.
It is the latest embarrassment for the accountancy firm after its £2.3m fine last year for “serious lack of competence” over the audit of the collapsed cafe chain Patisserie Valerie.
In relation to the failings of the 2016 audit, the FRC investigation focused on Grant Thornton’s failure to disclose a firm called “Delivery Company A” as a related party to Mike Ashley’s Sports Direct in the accounts.
Delivery Company A has previously been widely reported as being Barlin Delivery Ltd, a firm paid to make international deliveries to the chain’s customers, which was controlled by John Ashley, the brother of the retail billionaire.
On Monday, the FRC said that Grant Thornton, the UK’s sixth-biggest accountancy firm, “failed to treat with professional scepticism management’s assertion that Delivery Company A was not a related party”.
“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 FRC said.
In relation to the 2018 audit, the FRC was investigating work relating to an inventory provision of £162m and website sales, which accounted for a fifth of total sales, both of which Grant Thornton had highlighted as areas of “significant risk”.
“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,” the FRC said.
The FRC fined Grant Thornton just over £2m in relation to the 2016 and 2018 audit failings, but reduced this to £1.3m due to early admission of the failings. The fines for Westerman, who no longer works at Grant Thornton, were cut from £350,000 to £80,000.
“The audit failings in this case were serious and relate to fundamental auditing standards,” said Jamie Symington, the deputy executive counsel to the FRC. “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 latest FRC investigation focused on Grant Thornton and made no findings about Sports Direct itself.
In a statement Frasers said it still believed it was “technically correct in its disclosure of related party transactions”, but it admitted that “with hindsight further disclosure within the accounts might have avoided this particular aspect of FRC’s investigation”.
The company added that “there are no criticisms of Frasers, no issues in relation to Frasers’ historical financial statements and no findings that there were any undisclosed related party transactions”.
Grant Thornton, which resigned as Sports Direct’s auditor in 2019 after a separate scandal over the last-minute disclosure of a €674m (£570m) tax bill demand by Belgian authorities, said it was pleased the long-running matter had been brought to a close.
In a statement, Grant Thornton said: “Having invested significantly in the quality of our audits since this time, we have seen a marked improvement in our results and are confident that the issues identified by the FRC’s investigations … are not reflective of the work we do today.”