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Grant Thornton fined over audit failings at outsourcer Interserve

Grant Thornton has been fined more than £700,000 by the UK accounting regulator for audit failures at Interserve, the former FTSE 250 outsourcer which fell into administration in 2019.

The sanction, reduced from £1.3m for “exceptional co-operation”, is the second in just over a month to be levied against Grant Thornton by the Financial Reporting Council.

The regulator imposed a £2.3m fine at the end of September for a “serious lack of competence” in the firm’s auditing of café chain Patisserie Valerie, which also went into administration.

Simon Lowe, the Grant Thornton partner who led the audits, was fined more than £38,000 — reduced from £70,000 — and reprimanded by the regulator. Lowe ceased to be a partner in June 2018 after 43 years in the profession but remains a consultant at Grant Thornton, the UK’s sixth-largest accounting firm.

The FRC also ordered Grant Thornton to pay investigation costs of £467,000 and to report to it for two years on its monitoring of the quality of its audit work on lossmaking contracts.

Interserve had annual revenues of £3.2bn and employed about 55,000 people when its lenders took control through a prepack administration in March 2019, just 14 months after fellow outsourcer Carillion entered liquidation.

Most of its income was from UK government contracts including for the provision of probation services and building schools, hospitals and offices.

The FRC said the size and nature of its business meant there “was a significant public interest” in the audit of Interserve’s financial statements.

“This is a proportionate package of sanctions in respect of failings over three consecutive audit years,” said Claudia Mortimore, deputy executive counsel to the FRC. The sanctions reflected the seriousness of the audit failings but recognised that the problems “were limited to discrete areas of large audits”, she said.

Interserve’s accounts for the financial years ended in 2015 and 2016 included substantial loss provisions arising from contracts relating to waste treatment facilities in Glasgow.

The FRC found that the auditors failed to obtain sufficient evidence around the company’s calculation of the provisions and its assumptions that losses would be recoverable under a “pain share clause” in its contract or from a subcontractor or its insurers.

They also failed to show enough scepticism as to how the company arrived at its figures, it concluded.

Grant Thornton’s assessment of the company as a going concern and the impairment of goodwill in the accounts for the 2017 financial year, which had been identified as areas of significant risk, were also criticised by the regulator.

The FRC did not claim that Interserve’s financial statements were materially misstated because of the audit breaches.

Interserve’s administrators at EY took the unusual step of allowing the FRC to use Interserve’s legally privileged files in its investigation. The watchdog published only a summary of its findings so the contents of the documents would remain confidential.

“Whilst we acknowledge the regulator’s findings that certain limited aspects of our work were below expectations in this instance, it’s important to note that the findings did not assert that the company’s accounts were materially misstated in respect of these matters,” Grant Thornton said.

“We have invested significantly in our audit practice since the period in question, to drive consistently high quality and are now seeing the positive outcome of this investment,” it said, pointing to its most recent audit quality scores from the regulator.

Grant Thornton remains under investigation over its audits of retailer Sports Direct.

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