Fri. Dec 3rd, 2021

Grant Thornton broke the Big Four auditor monopoly on the FTSE 100 for the first time in more than two years.

The UK’s sixth largest accounting firm is auditor of Darktrace, the cybersecurity group that was promoted to the blue chip index last month.

But the milestone of having a “challenger” accountant back among the FTSE 100 companies – the Big Four of Deloitte, EY, KPMG and PwC are still looking at the accounts of the index’s other 99 companies – has been overshadowed by a spate of sanctions and investigations against Grant Thornton and other middle-level accountants.

A damning report by the British accounting regulator in September led to a series of failures in Grant Thornton’s Audits of Cake Seller Patisserie Valerie, which went into administration in January 2019. The Financial Reporting Board has fined the UK’s sixth largest accounting firm £ 2.3m for failing to provide reasonable assurance that the accounts were free from material misstatement.

In the six weeks since the Patisserie Valerie sanctions were announced, the FRC has hit Grant Thornton with another £ 1.2 million in fines and costs for defective audits at Interserve, a collapsed outsourcer. It also launched investigations into work by three of its fellow challengers: BDO, Mazars and Crowe.

The challengers insist they can provide high-quality audits of large listed companies, but recent investigations threaten their credibility.

The enforcement blitz came at a delicate time for the smaller firms, as ministers weighed whether they should proceed with plans for “managed shared audits”, which would require large UK-listed companies audited by a Big Four firm, must hand over part of the work. to a challenger.

Some of the mistakes made by Grant Thornton at Patisserie Valerie were “just so basic that it’s hard to see any value in any other audit work they’ve done”, said Tim Bush, chief executive at Pirc, a UK shareholder adviser.

Errors uncovered by the FRC included the failure to investigate the “doubtful origin” of “bank statements” which were in fact spreadsheets and “invoices” with missing logos, spelling errors and incorrect addresses.

Grant Thornton said his audits improved after investing and declined to comment further.

The challengers argue that their recent problems should not derail the impetus for competition, which continues to hamper even the mid-cap FTSE 250, where they now audit 25 companies, up from 10 five years ago, according to Adviser Rankings.

Bar graph of number of clients showing Big Four still dominates FTSE 350 audits

A small number of recent FRC investigations into challengers should not “be an excuse to cling to the status quo,” said Scott Knight, chief auditor at BDO, the biggest challenger.

“As numerous high-profile audit failures have shown, audit firm size is not necessarily correlated with quality,” added Knight, whose firm is being investigated for its audits of the collapsed construction company NMCN.

The FRC has fined the Big Four and their partners £ 42 million over the past three years for failed audits. The firms are still being investigated for audits by Carillion, NMC Health, Thomas Cook, London Capital & Finance and Mitie.

Proponents of shared audits believe it will help challengers gain expertise to compete more meaningfully. Government modeling predicts the plan will help them win up to 12 percent of FTSE 350 audit fees within a decade, giving them a chance to fill the gap if a Big Four firm ever leaves the market, like Arthur Andersen in the aftermath of the Enron scandal two decades ago.

But the Big Four has refused to support the plan, while BDO and Grant Thornton are reluctant to play second fiddle to larger competitors. Chairman of companies’ audit committee questioned whether the additional costs would result in better audits.

The Audit, Reporting and Management Authority, a more powerful regulator that will replace the FRC, can also be given the right to limit the number of audits can undertake a single firm, a solution favored by Deloitte, EY and BDO.

After years of operating against change, “it’s time for regulation under ARGA to intensify and for competition to open up,” Knight said.

A patisserie Valerie cake shop.
A patisserie Valerie cake shop. Grant Thornton fined more than £ 2.3m for ‘serious lack of competence’ in his audit of the British cafe chain © Simon Dawson / Bloomberg

The results of annual FRC quality inspections does not help the challengers’ case.

Nearly half of Grant Thornton’s audits were inspected in 2020 requires improvements although the firm received the best score from the seven largest firms this year.

Most BDO audits reviewed this year fell below the required standard while three of the seven Mazars audits inspected required improvement. Mazars being investigated for its audit of retailer French Connection.

BDO and Mazars expanded their audit practices and won larger, more complex audits. BDO overtook PwC as auditor for the largest number of London-listed companies, and grew its FTSE 350 client list to 16 – more than the other challengers combined, according to Adviser Rankings.

Mazars’ UK and global head of audit, David Herbinet, said the challengers could grow comfortably at a rate that would give them a significant share of the FTSE 350 market within five years – but managed shared audits need them to do enough good quality work. give so they can entice auditors to join the Big Four.

Quality scores need to be looked at over the longer term and larger companies have had poorer results in the past, he added.

KPMG, whose overall scores this year were barely better than Mazars’s, has been repeatedly criticized by the FRC over its bank audits.

While the government is considering how to boost audit competition and quality, the challengers will hope that ministers’ memories of the Big Four’s failures in the past will outweigh any doubts raised by their own recent hardships.

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