Grant Thornton UK was fined a total of approximately 1.3 million pounds (U.S. $1.6 million) by the Financial Reporting Council (FRC) for failing to provide reasonable assurance during two separate audits at retailer Sports Direct International.

The firm received a penalty of £1,130,500 (U.S. $1.36 million) for deficiencies in its fiscal year 2016 audit at Sports Direct and £193,375 (U.S. $232,000) for lapses in 2018. The sanctions were reduced from £1.7 million (U.S. $2 million) and £350,000 (U.S. $420,000), respectively, for “significant” cooperation, early admissions, and remedial actions already undertaken, according to the FRC’s news release Monday.

Grant Thornton further agreed to report to the FRC regarding changes it has made to its audit methodology for audit team judgments, audit of inventory provisions of retail entities, and use of audit data analytics to audit revenue. The firm received a severe reprimand and must declare its 2016 and 2018 audits did not meet relevant requirements.

Philip Westerman, a former Grant Thornton partner, was also reprimanded and received reduced fines of £63,000 (U.S. $76,000) and £16,575 (U.S. $20,000) for deficiencies in his 2016 and 2018 work, respectively.

The details: Sports Direct, a subsidiary of Frasers Group, operates more than 700 physical stores in addition to serving customers online. The retailer has been audited by Grant Thornton since 2007, and Westerman began serving as statutory auditor for the engagement since 2014.

At issue during the 2016 audit was whether an unnamed delivery company should be considered a related party to Sports Direct. “[While] the respondents identified related parties as an area of significant risk, they failed to treat with professional skepticism management’s assertion that Delivery Company A was not a related party of [Sports Direct],” the FRC stated. “There were a number of relevant factors which should have prompted the respondents to consider and follow up matters further, but they did not.”

The regulator faulted Grant Thornton and Westerman for obtaining insufficient audit evidence regarding the matter, failing to evaluate the relationship between Sports Direct and the delivery company, and failing to communicate related parties had been identified as an area of significant risk.

During the 2018 audit, Grant Thornton and Westerman were confronted with Sports Direct’s disclosures of a £162.2 million (U.S. $195 million) inventory provision and that website sales was the second largest area of its revenue that year. The auditors failed to obtain sufficient appropriate evidence regarding the reliability of the information.

The FRC noted its investigation was concerned only with Grant Thornton’s conduct during the audits, not Sports Direct’s disclosures. The regulator’s executive counsel did not “assert that any of the respondents’ breaches resulted in the financial statements for either 2016 or 2018 being materially misstated.”

“It is particularly important that auditors follow up with due rigor where they have identified potential related party transactions as a significant audit risk,” said FRC Deputy Executive Counsel Jamie Symington in the release. “Auditors must adopt a mindset of professional skepticism and exercise good judgment based on sufficient and properly documented evidence.”

Grant Thornton response: “We are pleased to now conclude these long-running matters, which date back to 2016,” a firm spokesman said in an emailed statement. “Having invested significantly in the quality of our audits since this time, we have seen a marked improvement in our results and are confident that the issues identified by the FRC’s investigations, [while] limited to discrete areas of the audits, are not reflective of the work we produce today.

“Today’s announcement marks the final outcome of legacy FRC investigations, all of which have been in the public domain for some time.”