Grant Thornton comes under scrutiny for Sports Direct role

19 February 2019 5 min. read
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Global auditing and advisory firm Grant Thornton has been attacked by critics for its accounting role for Sports Direct. The firm was expected to step aside, pending an investigation from the UK’s competition watchdog; but with the Big Four unwilling to step in at the controversial retailer, Grant Thornton presently remains in its role despite facing an FRC probe on the matter.

In the Autumn of 2018, it was reported that Sports Direct’s long-time auditor, Grant Thornton, was set to stand aside, due to competition rules. At the time, Grant Thornton had held the role since before Sports Direct floated on the London Stock Exchange in 2007, while Phil Westerman, the Partner at Grant Thornton responsible for signing off Sports Direct's accounts, had himself undertaken the work for five years, meaning he was obliged to step aside to preserve the independence of the firm's work.

At the same time as this development emerged, the Financial Reporting Council (FRC) announced it would conduct an investigation into Grant Thornton’s audits of Mike Ashley’s Sports Direct for the financial year ending April 2016. Sports Direct Retail reportedly used Barlin Delivery to provide deliveries to their customers, making large undisclosed payments to the logistics company, owned by John Ashley – the brother of Sports Direct owner Mike Ashley – in the process. The accounting watchdog stated it would examine Grant Thornton regarding the failure to disclose the relationship between Sports Direct and Barlin.

Grant Thornton comes under scrutiny for Sports Direct role

The sudden development saw Sports Direct submit a request in its annual report published earlier this year for Westerman's term to “be extended by one year to cover the FY19 audit", while noting that it intended to appoint a successor by the end of 2018. While fortunately the fiscal year runs to April 2019, Sports Direct found no such replacement for its more immediate 2018 deadline, and replacing Grant Thornton in the future may still be easier said than done. According to a report from Sky News, the world’s largest auditing and advisory firms refused to tender for the audit of Sports Direct International.

At the time, EYKPMG and PwC each ruled themselves out of the process as a result of potential conflicts of interest and reputational issues which related to the corporate governance of Sports Direct, according to sources close to the story. Since then, it also became clear that Deloitte, the other member of the gang of four, had no intention of participating in the process. With the Big Four under mounting scrutiny from the FRC, a contract with Mike Ashley’s controversial outfit was likely to be more trouble than it was worth.

Thus, five months after it was announced Sports Direct would look for a new auditor, Grant Thornton remains in the role, and has attracted mounting criticism for doing so. The firm has endured a difficult start to 2019, with the collapse of Patisserie Valerie sparking a further FRC probe into the firm’s work, while newly installed UK CEO David Dunckley enraged Members of Parliament by telling them the idea auditors should detect fraud was part of an “expectations gap”.

Speaking to the Business, Energy and Industrial Strategy (Beis) Select Committee, Dunckley said, “We’re not looking for fraud, we’re not looking at the future, we’re not giving a statement that the accounts are correct… There has to be an acceptance that if there is a sophisticated fraud happening in a business, the audit as is now… may never see it.”

Referring to the £40 million black hole that ultimate saw Patisserie Valerie go bust, Committee Chair Rachel Reeves responded that FRC rules state auditors should detect misstatements caused by error or fraud. Driving home the point, Reeves added, “In a shop that sells tea and cakes, you’d sort of think that might be spotted.”

Toothless watchdog

Grant Thornton’s continued role at Sports Direct seems to have further kicked the hornet’s nest with the press; riled by the news that the accountancy had retained its role, the Daily Mail labelled Grant Thornton a “tainted bean counter”. According to recent accounts, Grant Thornton has racked up around £17 million in fees over the past decade for audit work on the holding company for Mike Ashley's business interests, Mash Holdings.

Commenting on the findings, Peter Kyle, a Labour MP and another member of the Beis committee, said, “The relationship is too profitable for both parties to risk changing. That is when dysfunction creeps into an organisation. We need to be aware of that.”

While the FRC continues to take its time investigating whether Grant Thornton failed to properly disclose in Sports Direct's 2016 accounts, meanwhile, it will also be feeling pressure to act on the situation. The entity has been continuously lambasted as not fit for purpose by industry experts. Most notably this saw an investigation led by Sir John Kingman conclude it should be replaced “as soon as possible” by an independent statutory regulator.

Interestingly, sources close to the entity have told the press that the FRC itself approved the quality of an audit of Patisserie Valerie’s accounts, six months before the café chain revealed its massive fraud that brought the company to the brink of collapse. According to a report from The Times, the watchdog conducted a review of Grant Thornton’s auditing work on the 2017 accounts of Patisserie Holdings as part of a random sample of businesses whose audits it inspected last spring. This places the regular in an awkward position, of being pressured to hold Grant Thornton to account, while having itself had a hand in the ill-fated auditing work.