Sanctions against Grant Thornton re: Interserve plc

Grant Thornton were given sanctions as follows:

• A financial sanction of £1.3m (discounted to £718k);
• A requirement to report to the FRC on its monitoring programme of the quality of audit work on loss-making contracts;
• A severe reprimand; and
• A declaration that the statutory audit reports for the audits did not satisfy the relevant requirements.

There were serious failings in the evidence and scepticism by the auditors in respect of key judgements and accounting estimates.

Key issues

Key issues identified included:

• The estimated recoverability of an insurance claim was not supported by adequate expert evidence;
• Insufficient consideration was given to potential alternative interpretations of contract terms;
• Inadequate work on management estimates (including one cost expressly described as a “guestimate”);
• In one instance, estimated recoveries under a claim exceeded the costs actually incurred – sufficient appropriate evidence as to whether the estimated recoveries were reasonable was not obtained;
• Sufficient work was not performed to obtain an understanding of the general IT controls used to aggregate divisional budgets (which were then used as part of going concern work);
• The potential impact of differences between projected working capital movements and projected balance sheet movements in the business plan (used as part of going concern work) were not sufficiently considered; and
• There was insufficient challenge of the forecast margin used in management’s assessment of impairment.

The FRC’s summary of the final decision notice is available here. The case is particularly notable because certain evidence from GT’s files was disclosed to the FRC in confidence and remains legally privileged – the FRC has therefore only been able to publish a summary of the final decision notice.

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