Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Grant Thornton has been relegated from the UK regulator’s top tier of audit supervision after the firm cut its number of high profile clients, removing more than 70 per cent of those in the “public interest” category, which includes listed companies, credit institutions and insurers.
The Financial Reporting Council industry watchdog moved the UK’s sixth-largest accounting firm from “tier one” to “tier two” supervision status last year, according to regulatory filings.
It means the watchdog will only conduct inspections of the firm’s “public interest entity” audits every three years, rather than every 12 months.
Grant Thornton cut the number of PIEs it audits by more than 70 per cent between 2016 and 2022, auditing 20 of them in 2022, while rival BDO had 217 PIE clients during the same period.
Grant Thornton has been hit with a number of regulatory fines for failings in its audit work in recent years. It has received a total of £4mn in fines since 2021 after the FRC uncovered shortcomings in its audits of collapsed café chain Patisserie Valerie, retailer Sports Direct and outsourcer Interserve.
In 2022, the administrators of Patisserie Valerie also settled a £200mn lawsuit with Grant Thornton that alleged negligence in its audits of the café chain.
In Grant Thornton’s most recent audit quality report, the regulator said it had improved and Sarah Rapson, executive director for supervision at the FRC, said its move from tier one to two “is not a reflection of [Grant Thornton’s] audit quality but reflects their smaller share of the PIE market”.
Grant Thornton said: “We are extremely proud of our quality results over the last three years and respect the regulator’s decision to include our firm in its ‘Tier 2’ category of supervision.
“The decision by the FRC has no impact on our audit strategy and our continual investment in audit quality.”
The firm’s demotion to “tier two” leaves the Big Four — Deloitte, EY, KPMG and PwC — plus BDO and Mazars as the remaining “tier one” firms. The work of these firms is closely scrutinised by the FRC because they check the books of more PIEs.
Breaking the hold of the Big Four on the market by having challenger firms such as BDO, Mazars and Grant Thornton audit a bigger share of PIEs, is a key element of the government’s long-delayed plans to overhaul the sector.
Martin Clapson, chair of the Association of Practising Accountants, which represents 20 mid-sized accounting firms, said: “We need the FRC to focus on being an improvement regulator with a ‘prevention is better than cure’ approach. In practice that means working with challenger firms to help us understand what good looks like so we can scale up.
“We are still a long way from a truly competitive audit market that drives quality and choice.”
Rapson said the FRC played “an important part in improving competition and quality for smaller firms”.
In an annual report published by the FRC in December, it found that audits carried out by smaller accounting firms — those in “tier two” and “tier three” — in the year to March were “again unacceptable”, with 38 per cent of those reviewed requiring “significant improvement”.
Grant Thornton’s demotion was confirmed in a 31-page report published by the FRC in July but was not publicly commented on by the firm until now.
