Why I’m feeling a small tinge of sympathy for Grant Thornton…

August 5th, 2019
05 August

Now steady on. Accountants all over North Staffordshire are clutching at their chests and hanging onto doorframes for support as they read that headline.  This blog is a little longer than normal and those with a nervous disposition, or have a dislike of sarcasm, should not read further…

“What on earth does Williamson, the Scourge of Overpaid Underperforming Audit Giants, think he is doing?”, I hear them roar.

Steady now. Of course, I’m not going soft on the large audit brands. How could I? I’ve just finished wading through the International Forum of Independent Audit Regulators (IFIAR) seventh annual survey of inspection findings to discover that the number of deficient audits performed by the six largest global audit firm networks stands at 37%.

THIRTY-SEVEN PER CENT! That’s over a third of tested audits and an awful lot of duff auditing from the so-called professional superstars of the number crunching world. But guess what? That figure actually represents an improvement of 3% over last year’s figure. In fact, five years ago the number of audits found to have significant deficiencies stood at 47%. 

But (apparently) that’s OK because, as IFIAR says, “the downward trend is encouraging”. (No, honestly, they really did say that). Cheering news, then, for the shareholders of audited companies.  The IFIAR does add, however, that “the recurrence and level of findings reflected in the survey indicate a lack of consistency in the execution of high-quality audits and the need for a sustained focus on continuing improvement”.

Which roughly translates as “why don’t you just do your bloody job like the rest of us independent firms do!?” (To be fair, that’s actually MY rough translation).  The issue that the poor loves mainly get wrong relates to accounting estimates. In 2018, 28% of deficient audits failed in relation to fair value measurement. The next most problematic areas were internal control testing (15%) and adequacy of financial statement presentation and disclosure (13%). Just remember that word ‘disclosure’ because we will be seeing it again towards the end of this blog.

Deficiencies in the audits in question are defined as “serious enough to indicate that the audit firm did not obtain sufficient appropriate audit evidence to support its opinion” (but just enough to warrant submitting an invoice, one imagines).

The six global audit firm networks are BDO International, Deloitte Touche Tohmatsu, Ernst & Young Global, Grant Thornton International, KPMG International Cooperative and PricewaterhouseCoopers International.

Last October, IFIAR’s UK member, the Financial Reporting Council reported that 27% of the audits it inspected in 2018 needed more than limited improvements. It laid the blame largely on “an unacceptable deterioration in quality at one firm, KPMG”.  Ah yes, KPMG.  I’ve lost count of the mishaps encountered by that particular firm. I see that their current little problemette involves them possibly having to pay a $50million fine to settle claims that former employees were tipped off about forthcoming inspections by America’s audit watchdog.

So WHY, then, do I feel a twinge of sympathy for Grant Thornton? Well, it’s because they are the auditors for Sports Direct – and Sports Direct did not tell its auditors that it faced a £605million tax demand until the day it was due to release its annual results.  You will remember that Sports Direct bought House of Fraser out of administration last year and this tax bill, apparently, is part of the fallout from that transaction.

According to the Telegraph (here) “the bombshell sparked a chaotic day of repeated delays that ended with Sports Direct publishing its financial report after the stock market had closed. The update had already been held back by more than a week, amid differences of opinion between Grant Thornton and Sports Direct’s founder Mike Ashley over the way the retailer accounts for its stock”.

I just love the phrase “differences of opinion”. No doubt opinions differed even more when the company produced the unexpected £605million tax bill. I think at this point that the word “disclosure” may have entered into that conversation, too. Oh, to be a fly on the wall at that meeting.

The Telegraph further noted that in its description of the tax claim, included in the final paragraph of the report, Sports Direct said it planned to “investigate further” with the help of its tax adviser, the Big Four audit firm Deloitte.  “Clearly Deloitte must have been aware,” a source close to the events said, claiming it was unusual that Grant Thornton had not been informed. “Auditors shouldn’t be surprised by information such as this,” the source said.

And, of course, the source is right. Even without the shambolic approach to auditing that seems to characterise some operations of the big brand audit firms, no auditor can carry out an effective, meaningful and honest audit without access to accurate, timely and complete data.

Mr Ashley later announced plans to drop Grant Thornton in favour of one of the Big Four, saying the company would begin an audit tender process “in due course”.  My advice to Grant Thornton would be – settle that invoice you issued and move on…

Speaking of “…accurate, timely and complete data…” this is exactly what we see most of our insolvency clients NOT having, either because they don’t appreciate the importance of having up to date financials, or they’re too busy working in their business and not on it.  This is where my skills as an Insolvency Practitioner come in – we will take an independent look at the health of a business and ask some very pointed questions to dig out that one bad apple that could cause a problem.

If any of my accountant colleagues feel their client isn’t being completely open with them, call me and I’ll have a chat with you about what I can do to help.