Grant Thornton, the former auditor of the UK coffee and cake chain that collapsed into administration last month amid allegations of accounting fraud, argued that it was not the role of accountants to uncover fraud!
That should ring alarm bells to investors in both private and public companies. Can you really trust reported numbers? How well have they been scrutinised if at all?
Last year, the Financial Reporting Council commented that there had been a big decline in the quality of audits across the big four accountancy firms including Delloitte, EY, PwC, and KPMG. In the last few years alone there has been a string of investigations of faulty accounting and bad practices that have seen some of the UK's best known companies fall into administration. To name just a few:
Pastisserie Valerie (Grant Thornton)
A £40 million pound black hole in its accounts was unearthed by the Series Fraud Office
A daming report by MPs last year showed that KPMG was complicit in signing off on reports of what they described as "increasingly fantastical figures" and that internal auditor Deloitte had failed to identify "terminal failings" in risk management and financial controls or just as bad "too readily ignored them".
In 2017, Rolls-Royce agreed to pay more than £600 million pounds in penalties related to a long running corruption scandal.
Misstated profits at it's Italian subsidiary to the tune of more than £500 million pounds. Their long-standing auditor of more than 3 decades PwC stood aside after the scandal making way for KPMG.
Mitie Group (Deloitte)
Competitor to Collapsed Carillion, Mitie Group swung to a full year loss in 2017 after an accounting review forced them to take a signficant hit to their financials.
BHS's accounts were deemed by the FRC to be incompleted, innaccurate, and misleading! PwC ended up paying out a £6.5 million pound fine after admitting to "serious shortcomings" with their audit work and that it had "important lessoes to learn". LOL!
Sports Direct (Grant Thornton)
Grant Thorton decided that it didn't think Sports Directors relationship with Barlin Delivery was worth disclosing as a related party. This is despite the fact Barlin Delivery was responsible for all the companies online deliveries and happened to also be run by CEO Mike Ashley's brother. Oops!
Ted Baker (KPMG)
KPMG got slapped with a £3 million pound fine after providing an expert witness account to Ted Baker in a commercial court case which compromised their independence and objectivity. There was also a cheeky £80,000 pound fine for one of the firms audit partners. Walking around money really!
Although channel checks are not a silver bullet to uncovering evidence of accounting fraud, in many cases our interviews with company stakeholders including customers, suppliers, employees, and distributors can uncover red flags that suggest mal-practice is at foot.
Our most recent example of this was our short/sell recommendation on Under Armour where we were confident that reported numbers and management guidance were at odds with our interviews and surveys. It's usually the case in our experience that when management reported results differ from what 100's of independent subject-matter experts are telling us - we tend to give the benefit of the doubt to the widsom of the crowd over biased or self-serving interests!
To learn more about how we help investors gain deeper insights into target companies, contact us at firstname.lastname@example.org