Interserve plc’s former auditor Grant Thornton has been slapped with a £718,250 fine for failings regarding the company’s accounts in the years before its demise.

The Financial Reporting Council’s Executive Counsel also issued Grant Thornton with a “severe reprimand” in light of the breaches in verifying Interserve’s results for the 2015, 2016 and 2017 financial years.

The fine could have hit £1.3m, but was reduced due to the firm’s cooperation and admissions.

Grant Thornton audit engagement partner Simon Lowe, who was senior statutory auditor of the relevant consolidated financial statements, was also given a penalty of £38,675. This had originally been set at £70,000, but was reduced due to Lowe’s “exceptional cooperation” and admissions.

Interserve entered administration in March 2019, with its assets and contracts acquired in a pre-pack administration by the group’s lenders, which formed a new entity known as Interserve Group Ltd. Since then, the group’s FM business has been sold to Mitie and its RMD Kwikform operation to Altrad. The construction business is still owned by Interserve’s former lenders and was rebranded as Tilbury Douglas earlier this year.

The FRC decision notice issued today relates to auditing work carried out by Grant Thornton on loss provisions on problem energy-from-waste contracts made in Interserve plc’s 2015 and 2016 accounts, and on impairments to going concern and goodwill values in the contractor’s 2017 results.

Despite the fines and reprimands, the regulator’s Executive Counsel stressed that it was not suggesting there was any “material misstatement” of Interserve’s position in its financial statements for the years in question. It added that the breaches it found were not due to “dishonest, deliberate or reckless” actions.

The contractor’s revenue remained constant at £3.2bn in all three of these years – but the pre-tax profit of £79.5m made in 2015 turned to a pre-tax loss of £94.1m the next year and this grew to a £244.4m loss in 2017.

A deal to build an energy-from-waste plant in Glasgow, secured in 2012, had turned sour. In 2015, losses of £28.7m were recognised in relation to this contract, while in 2016 the contract was terminated and accounted for £91.4m of a larger exceptional loss.

Separately, an impairment of £60m was recognised against goodwill in 2017 in respect of Interserve’s private sector FM business.

‘Insufficient scepticism’

The Executive Counsel found that Grant Thornton was in breach of International Standard on Auditing 200 (ISA 200) rules in failing to exercise sufficient professional scepticism when assessing the merits of a claim made by an Interserve subsidiary against a subcontractor on the Glasgow project.

The decision notice added that “inadequate audit work was conducted” when verifying a critical estimate of the costs that the Glasgow client could expect to incur completing the project after Interserve was removed.

As well as further issues with the auditing of accounts relating to the troubled energy-from-waste project, the FRC found that the Grant Thornton team “failed properly to document” its thinking on whether Interserve was truly “committed” to a cost-saving programme that formed the basis of goodwill impairment in 2017.

Lowe was responsible for the overall quality of the audits in question and was under personal obligation to consider whether sufficient appropriate audit evidence had been obtained.

FRC deputy executive counsel Claudia Mortimore said: “This is a proportionate package of sanctions in respect of failings over three consecutive audit years. It reflects on one hand the seriousness of certain evidence and scepticism failures in 2015 and 2016, while recognising that the adverse findings were limited to discrete areas of large audits.”

A spokesperson for Grant Thornton UK said it had “co-operated fully” with the FRC throughout the investigation and had since improved its audit practice: “While we acknowledge the regulator’s findings that certain limited aspects of our work were below expectations in this instance, it’s important to note that the findings did not assert that the company’s accounts were materially misstated in respect of these matters.

“We have invested significantly in our audit practice since the period in question, to drive consistently high quality and are now seeing the positive outcome of this investment – evidenced most recently in our latest AQR scores.”

Interserve's 2019 accounts were published earlier this year.