Another Fine for Grant Thornton over Audits at Sports Direct

Back to more serious issues after my last blog post on selecting a Prime Minister. The FRC have issued penalties against Grant Thornton for their audit work at Sports Direct in 2015-16 and 2017-18. One concern was about the failure to recognise that contracts with a delivery company were probably “related party” transactions.

To quote from the FRC announcement: “The audit failings in this case were serious and relate to fundamental auditing standards. It is particularly important that auditors follow up with due rigour where they have identified potential related party transactions as a significant audit risk. Auditors must adopt a mindset of professional scepticism, and exercise good judgment based on sufficient and properly documented evidence. The package of financial and non-financial sanctions imposed by the FRC on the auditors in this case will help to drive improvements at the firm and the wider industry.”

See https://www.frc.org.uk/news/july-2022/sanctions-against-grant-thornton-uk-llp-and-philip  for more information.

This is of course not the first time Grant Thornton has been involved in defective audits – see the cases of Patisserie Valerie and Globo for example.

Grant Thornton may be more careful in future but as I keep on saying, even audited accounts cannot be trusted at present. I don’t think that will change until the penalties for failed audits are made larger and the penalties for errant directors who publish misleading accounts made a lot more severe.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Ventus VCT AGMs – A Disappointing Result, National Grid and Sports Direct

I have mentioned previously the attempt by a shareholder in the Ventus VCTs (VEN and VEN2) to start a revolution, i.e. replace all the directors and appoint new ones. See https://tinyurl.com/y6e5fafo . Nick Curtis was the leader of the revolt but at the AGMs on the 8th August the required resolutions were narrowly defeated with one exception. This was after the boards of these companies paid a proxy advisory service £38,000 to canvas shareholders, which of course shareholders will be paying for as it is a charge on the companies.

There is a report on the meetings by Tim Grattan in the ShareSoc Member’s Area which gives more details. One surprising bit of information that came out was that the performance incentive fee payable to the manager would be paid in perpetuity even if the management agreement is terminated. This is an outrageous arrangement as it would effectively frustrate any change of manager, i.e. it’s a “poison pill” that protects the status quo.

In addition the performance fee calculation is exceedingly complex, and allegedly double counts the dividends because it is based on the sum of total return and dividends. It seems to be yet another incomprehensible performance fee arrangement which I have often see in VCTs.

Comment: I think the existing directors deserve to be removed solely for agreeing to such arrangements. I have repeatedly advocated that performance fees in investment trusts (including Venture Capital Trusts) are of no benefit to shareholders and typically just result in excessive fees being paid to fund managers. There is no justification for them. Fund managers say that they are essential to retain and motivate staff, but I do not know of any VCT where the fund manager has voluntarily given up the role because of inadequate fees being paid even though some of them have had quite dire performance.

The boards of these VCTs are reflecting on the outcome. Let us hope that they decide it is time to step down and appoint some new directors who need to be truly independent of the manager. The candidates for the board put forward by Nick Curtis are a good starting point.

If the board does not respond appropriately, then I think shareholders should pursue the matter further with another requisition for an EGM to change the directors. It can take time to educate all the shareholders in such circumstances so perseverance is essential in such campaigns.

The Financial Times had more lengthy coverage on National Grid (NG.) and its power outage last week, which I covered in a previous blog post. It seems the company is blaming the power failures on the regional distribution operators for cutting the power to the wrong people, e.g. train line operators rather than households. But they suggest otherwise. Meanwhile an article on This is Money suggests that the increased sales of electric vehicles will cause the grid to be overloaded by 2040, even though sales of such vehicles are well behind those in some other countries. They were only 2.5% of sales in the UK in 2018, versus 49% in Norway. Surely what the UK needs is more back-up capacity based on batteries, gas turbines or like the Dinorwig pumped storage power station in North Wales. That can bring large amounts of capacity on-line in seconds and is well worth a visit if you are on holiday in the area.

Other interesting news is the recent events at Sports Direct (SPD). After problems with the last audit and getting the results out, Grant Thornton have announced that they do not wish to continue as auditors. All of the big four audit firms have refused to tender for the audit and other small firms have also declined it seems. Corporate governance concerns at the company seem to be one issue.

A UK listed company does require an audit so what does the company do if there are no volunteers for the role? The FRC is being consulted apparently on how to resolve this problem. Needless to say, these issues are having a negative effect on the company’s share price.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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