The breaches related to the firm’s assignment, support and monitoring of two engagement partners who were based in the financial services practice in Philadelphia and working on 2013 audits.
The US watchdog also found that the firm had violated PCAOB auditing standards in the audit of the Bancorp Inc, and it banned the engagement partner for the audit, David Burns, for a year and fined him $15,000.
“A firm's system of quality control should reasonably assure that personnel with the right skills and experience are assigned to public company audits,” said PCAOB chairman James Doty.
“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.
“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 investigators discovered that Grant Thornton was aware that Burns and another partner had failed to perform audits properly in previous years. Nevertheless, it continued to let them serve as engagement partners on two separate 2013 public company audits.
As a result, the firm and Burns failed sufficiently to consider red flags or contrary evidence in the case of Bancorp’s allowance for loan and lease losses, even though these indicated that certain commercial loans were impaired.
Both also relied on management representations without obtaining relevant and reliable evidence to corroborate those representations in breach of auditing standards.
In April 2015, Bancorp was forced to issue a statement that its financial statements for 2012 and 2013 could no longer be relied on because certain expected losses relating to commercial loans were taken in incorrect periods.
The restatement resulted in a $141m reduction in net loans at Bancorp’s December 2013 year-end and a 98% increase (up $28.9m) in its loan and leases losses during 2013.
Commenting on the findings, PCAOB director of enforcement and investigations Claude Modesti said, “Auditors must exercise professional scepticism when evaluating critical estimates, such as a bank’s allowance for loan losses.
“Grant Thornton and Burns violated fundamental PCAOB auditing standards when they failed to sufficiently question management’s estimates, even when confronted with evidence that was inconsistent with those estimates.”
Burns is no longer with the firm.
Neither he nor Grant Thornton admitted or denied the PCAOB’s findings.