Watchdog finds work of Patisserie Valerie auditor unacceptable

The former auditor of Patisserie Valerie, the cake and cafe chain at the centre of an alleged accounting fraud, has been placed under increased scrutiny after the industry watchdog called the quality of its work “unacceptable”.

Grant Thornton was the worst performer in the Financial Reporting Council’s annual review of audits by the UK’s big accountants. The FRC said half of the eight Grant Thornton audits it inspected for 2017/18 required significant improvement.

Across the industry, one in four audits failed to reach required standards, a finding that will intensify pressure on the firms, which are all already under scrutiny by the Competition and Markets Authority.

The audit of Patisserie Valerie was among those looked at by the FRC. Other Grant Thornton audits inspected by the regulator included the outsourcing company Interserve, which was sold in March after administrators were appointed, and Woodford Patient Capital Trust, the embattled investment trust run by the former star investor Neil Woodford. The FRC also reviewed Grant Thornton’s audit of Sports Direct.

Over the last five years Grant Thornton scored by far the worst of the accounting firms with 26% of inspected audits deemed to require improvement. The FRC ordered Grant Thornton, the UK’s sixth biggest accountant, to come up with a plan to overhaul its audit work and said it would inspect more of its work this year.

“This level of audit quality is unacceptable,” the FRC said. “The quality of the audits inspected in the year, and indeed the overall lack of improvement in quality over the past five years, is a matter of deep concern.”

Grant Thornton’s chief executive, David Dunckley, exasperated MPs in January when he said it was not his firm’s job to uncover fraud or judge that a company’s books were correct.

The FRC also criticised PwC, one of the big four accountants, for an unsatisfactory drop in the results for its audits. Only 65% of the firm’s audits of FTSE 350 companies required no more than limited improvements, down from 84% a year earlier and well short of the FRC’s 90% target.

No auditor achieved the 90% target despite pressure on the sector to improve after a series of scandals including the collapses of BHS, audited by PwC, and Carillion, audited by KPMG.

Audits carried out by PwC that the FRC inspected included Kier Group, the construction and services company whose recent profit warning prompted comparisons with Carillion, and the struggling department store chain Debenhams. The FRC did not disclose which audits were substandard from the list of companies it reviewed.

The regulator said its review showed no improvement from the year before and all seven firms inspected had failed to challenge companies’ management properly on matters of judgment. It increased its target for acceptable audits of FTSE 350 companies to 100% from next year and extended the 90% target to smaller companies.

Grant Thornton said it had published details of planned improvements to its audit practice and was working with the FRC to implement its plan. “Some of our past audits for large listed firms have fallen short of the standards we expect,” the firm said.

Stephen Haddrill, the FRC’s chief executive, said: “At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable. Audit firms must identify the causes of their audit shortcomings and take rapid and appropriate action to improve quality.”

Hemione Hudson, PwC’s head of audit, said: “We are disappointed that the results of the inspection are below the high standards we are committed to achieving on all of our audits.”

The big accountants have faced criticism from MPs for lax audit checks that put companies, jobs and taxpayers at risk when large companies such as Carillion collapse. The industry’s critics have accused the firms of not standing up to big clients and the FRC of being too cosy with the firms it is meant to hold to account.