Grant Thornton Settled with PCAOB for $1.5 Million Over Audit Failures and QC Violations

Chris Gaetano
Published Date:
Dec 21, 2017

Grant Thornton LLP settled with the PCOAB for $1.5 million over an audit of Bancorp, a Philadelphia-based financial services provider. At issue was GT's decision to assign two partners from its Philadelphia office who were previously known to have had audit quality issues to serve as the engagement partners on two separate fiscal year end 2013 issuer audits without providing them sufficient support or monitoring. Consequently, the firm was also found to have failed to comply with PCAOB rules and standards in connection with the audits of Bancorp's ICFR and Dec. 31 2013 financial statements. 

"Prior to the Philadelphia office's year-end 2013 audits, Grant Thornton had significant concerns with the proficiency and technical competence of two engagement partners in its Philadelphia office's financial services group," said the disciplinary order. "Despite those concerns, Grant Thornton failed to take sufficient steps to properly support or monitor the [engagement partners] when it assigned each to serve as an engagement partner on two separate 2013 issuer audits for financial services clients." 

The firm was found to have failed to exercise due professional care, including appropriate professional skepticism, and to obtain sufficient appropriate audit evidence concerning the reported value of Bancorp's net loans, the effectiveness and reasonableness of Bancorp's controls relating to its allowance for loan and lease losses– a known significant risk and significant accounting estimate. Consequently, the PCAOB said that GT had  failed to obtain sufficient appropriate audit evidence to support its audit opinions on Bancorp's financial statements and ICFR. This led to Bancorp announcing, in 2015, that its previously issued financial statements for the years ended December 31, 2012 and 2013 and the quarterly financial statements within those years and for the first three quarters of 2014 should no longer be relied on because certain provisions for loan losses related to commercial loans were taken in incorrect periods. The restatement resulted in a $141 million reduction in Bancorp's net loans as of Dec. 31, 2013, as well as increasing the firm's provision for loan and lease losses by $28.9 million (or 98 percent) during 2013 and $90.5 million (or 403 percent) during 2012. 

"A firm's system of quality control should reasonably assure that personnel with the right skills and experience are assigned to public company audits. When quality controls concerning personnel assignment and oversight fail, serious violations of auditing standards can result, as they did here, to the detriment of investors," said James R. Doty, PCAOB Chairman. "Effectively designed and operated quality control systems are crucial to conducting audits in compliance with PCAOB standards. This matter should serve as a case study for what not to do."

The PCAOB also sanctioned David M. Burns, a former Grant Thornton partner, who served as the engagement partner for the 2013 Bancorp audit, for his violations of PCAOB auditing standards in that audit. Burns was barred from associating with a PCAOB-registered accounting firm, with the right to petition to remove the bar after one year, with further limits on his auditing activities for an additional year, censured, and ordered to pay a $15,000 penalty. Neither of the respondents admitted or denied the findings contained in the Board's orders.

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