Grant Thornton has lost a lengthy battle to overturn a £22.3m court judgment that held it liable for negligence “of the utmost gravity” when it failed to expose a fraud at its former audit client, AssetCo.
The Court of Appeal on Friday ruled against Grant Thornton, the UK’s sixth-largest accounting firm, which had attempted to throw out a damaging 493-page judgment handed down early last year.
The judgment said “very serious” failings and “flagrant breaches of duty” by Grant Thornton auditors meant that dishonesty by some senior executives at AssetCo, an Aim-listed fire engine leasing company, went undetected and the company continued to pay dividends and racked up significant trading losses.
The Court of Appeal rejected Grant Thornton’s attempt to set aside the ruling, but reduced the damages it must pay to its ex-client to £15.6m, plus about £5m in interest and legal fees.
The decision is the latest blow for Grant Thornton, which is separately under investigation over its alleged failure to spot an apparent fraud at Patisserie Valerie, and could face a lawsuit from the administrators in charge of winding down the café chain.
It will also have far-reaching consequences for the audit profession. For the first time, the court allowed a company to sue its auditor for losses it made as a result of business decisions taken on the back of a misleading audit. This included the auditor being held responsible for dividends that could not lawfully have been paid if the accounts had been “competently audited”, the judgment said.
Grant Thornton said: “The work in question, which was done in 2009 and 2010, fell short of the standards expected of us. The quality of our audits is a key priority for us and we continue to invest significantly in our audit practice to ensure our audits deliver the necessary quality standards.”
The firm said it was considering whether to attempt to appeal against the decision again, which could take the dispute to the Supreme Court.
The accounting scandal at AssetCo, which used to supply fire engines in Lincolnshire and to the London Fire Brigade, wiped £266m from its balance sheet in 2011. A number of its directors had misappropriated funds, conducted fraudulent related-party transactions and forged documents. The company’s share price collapsed from 60p to below 2p and it was forced to sell its entire fleet of fire engines for £2. The company now has no business in Britain but provides fire and security services in the Middle East.
Grant Thornton was fined £2.3m by the Financial Reporting Council in 2017 over its audits of AssetCo. Robert Napper, the audit partner, was banned from the profession for three years and fined £130,000. In 2018, the FRC banned three former directors of AssetCo for misconduct and in some cases facilitating fraud.
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