The UK’s Financial Reporting Council has imposed sanctions against Grant Thornton and former partner of GT, Peter Westerman, over the 2016 and 2018 audits of Sports Direct International plc.
On top of a severe reprimand for both audits, Grant Thornton was fined a total of £1,323,875. Westerman was fined just under £80,000 and severely reprimanded.
In respect of the 2016 Audit, there were serious failings by the Respondents in the conduct of the audit concerning their assessment as to whether SDI’s financial statements contained the necessary disclosures to draw attention to the possibility that its financial position may have been affected by its relationship with Delivery Company A.
- Whilst the Respondents identified related parties as an area of significant risk, they failed to treat with professional scepticism management’s assertion that Delivery Company A was not a related party of SDI. 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 Respondents should have obtained audit evidence commensurate with the level of risk, but the evidence obtained was insufficient for the Respondents to reach a reasonable conclusion as to the appropriateness of the related parties disclosure.
- The Respondents failed to evaluate whether the overall presentation of the relationship between SDI and Delivery Company A in the financial statements met reporting requirements. In so far as the Respondents did consider these issues, they failed to document their consideration, conclusions, and audit evidence.
- Even though related parties had been identified as a significant risk, the Respondents also failed adequately to communicate this to those charged with governance before the 2016 financial statements were finalised.
In respect of the 2018 Audit, there were failures in the Respondents’ audit work relating to two specific areas of the audit: (1) inventory provisions; and (2) website sales revenue.
- The inventory provision in 2018 was £162.2m and an increase on the previous audit year. It was a highly material amount. Website sales was the second largest area of revenue for SDI in 2018, accounting for 20% of total revenue. The Respondents identified that both were areas of significant risk in the 2018 Audit.
- 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’s Executive Counsel said that it does not assert that any of the Respondents’ breaches resulted in the financial statements for either 2016 or 2018 being materially misstated. The Respondents’ breaches were limited to discrete areas of each audit.
