The FRC has fined Grant Thornton £4m (discounted for admissions and early disposal to £2.34m) in relation to the “serious lack of competence” in the 2015, 2016 and 2017 audits of Patisserie Holdings Plc (the AIM listed holding company for the Patisserie Valerie chain that collapsed in January 2019). The audit engagement partner, David Newstead, was also fined £150,000 for his role in the audits that the FRC described as showing “a pattern of serious lapses in professional judgement, failures to exercise professional scepticism, failures to obtain sufficient appropriate audit evidence and / or to prepare sufficient audit documentation”.
In addition to financial sanctions, Grant Thornton was subject to a three year reporting requirement to the FRC on the impact of remedial actions (including a root cause analysis), a review of the audit practice’s culture relating to challenge, and additional monitoring in relation to bank and cash audit work. Newstead was also given a three-year prohibition from carrying out Statutory Audits and signing Statutory Audit Reports.
The FRC specified that their decision was not, and does not rely on, a finding of fraud; the FRC decided that the audit failings of Grant Thornton and Newstead were deserving of sanctions regardless (and regardless of whether the auditors were in receipt of misleading information).
The watchdog found there were serious breaches across four areas of the audits: revenue; cash; journals; and fixed asset additions. Additionally, “failures were often repeated in each of the three years under consideration, and in relation to several legal entities in the Group” and many of the failures “concerned matters fundamental to the proper conduct of an audit”. The specific areas of failing will, doubtless, be scrutinised in the years to come both within and outside Grant Thornton, to ensure that lessons are learned.
However, for now, two points are notable from the sanctions issued by the FRC: the high level of discount granted (45%); and the extensive non-financial sanctions issued.
A hefty discount?
The discount against the fine received by Grant Thornton was significant; it amounted to 45%: 10% for an exceptional level of co-operation, and 35% for admissions and early disposal. This reflects a general increase in the level of discounts offered for co-operation in recent years, which may stem from the recommendations of the 2017 Clarke Review, which encouraged engagement and co-operation with the FRC. Comparing 2018/19 to 2019/20 the level of discounts offered by the FRC increased from 15% to 32% “reflecting improved co-operation” and in 2020/21 total discounts and reductions ranged from 20% to 44%.
But, where there is a carrot there is usually a stick. In 2019, the FRC noted in their Annual Enforcement Review that if cooperation fell below the “high level expected”, it may result in “non cooperation being considered as an aggravating factor”.
An increase in non-financial sanctions being issued by the FRC?
The Clarke Review also recommended that greater attention should be given to the use of non-financial sanctions. Since then the proportion of non-financial sanctions issued by the FRC has increased as shown in the chart below (numbers as reported in the FRC’s Annual Reports).
And the type of non-financial sanctions imposed has also varied: in recent years these have included increased monitoring in specific audit areas, undertakings to review and amend policies and procedures, and detailed annual reports on practices, policies and training programmes.
Overall, viewed by those with experience of dealing with regulators and prosecutors across multiple disciplines and multiple jurisdictions, the message of increasing cooperation to increase discounts, and of the importance of continual corporate improvement, will be nothing new. But this latest decision underscores the fact that those trends, in the audit space, seem here to stay for a while yet.