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  1. US regulator SEC penalises Grant Thornton India for auditor independence rules violations

US regulator SEC penalises Grant Thornton India for auditor independence rules violations

US markets regulator SEC today charged Grant Thornton India LLP and Australia-based group firm Grant Thornton Audit Pty Ltd with auditor independence violations that occurred when two partners served on the boards of Mauritius-based subsidiaries of their clients.

By: | Washington | Updated: October 1, 2015 11:20 PM
Grant Thornton India subsequently audited Client A's 2013 financial statements. However, SEC found that GT India was not independent.  (AP)

Grant Thornton India subsequently audited Client A’s 2013 financial statements. However, SEC found that GT India was not independent. (AP)

US markets regulator SEC today charged Grant Thornton India LLP and Australia-based group firm Grant Thornton Audit Pty Ltd with auditor independence violations that occurred when two partners served on the boards of Mauritius-based subsidiaries of their clients.

These partners served on the boards of the companies that were Grant Thornton audit clients and performed non-audit services prohibited under the SEC’s auditor independence rules, the regulator said in a statement.

Without admitting or denying the findings, both entities have agreed to cease and desist from future violations. However, the names of the clients were not disclosed.

“GT India agreed to pay disgorgement of audit fees in the amount of USD 128,905, plus prejudgement interest of USD 8,977, and a penalty of USD 50,000.

“GT Audit agreed to pay disgorgement of USD 88,683, plus prejudgement interest of USD 13,520, and a penalty of USD 75,000,” SEC said.

The watchdog has censured the two audit firms for violating the auditor independence standards besides sanctioning them for causing the issuers to violate the requirement to file annual reports with the Commission.

“The orders also found that the audit firms engaged in improper professional conduct in violation of federal securities laws and the Commission’s Rules of Practice,” SEC noted.

Andrew J Ceresney, Director of the SEC’s Division of Enforcement said the integrity of the financial reporting process relies on auditors to preserve and protect the independence of their audits.

“The two Grant Thornton firms undermined this process by failing to ensure that its audits were free from prohibited non-audit services,” he added.

The Securities and Exchange Commission (SEC) said the two Grant Thornton International LLP member firms represented in audit reports that they were independent of their respective audit clients when the audit clients paid fees to a consulting firm owned by two Grant Thornton Mauritius partners who served as board members for these audit clients.

“The objective of auditor independence rules is to ensure that outside auditors remain independent from their clients both in fact and in appearance throughout the audit and professional engagement period,” it added.

GT India and GT Audit violated the independence rules because the Grant Thornton Mauritius partners provided prohibited services for the audit clients, including controlling bank accounts and having authority to act on the audit client companies’ behalf.

The SEC also found that GT India and GT Audit failed to follow Grant Thornton International’s compliance control procedures.

GT Audit failed to obtain independence relationship checks and confirmation letters from member firms in countries where its audit clients have business operations, as required by Grant Thornton International.

GT India failed to obtain the confirmation letter.

According to the orders, the Grant Thornton firms failed to discover the independence violations until several months or years following the violations. SEC found GT Audit’s violations occurred with audits of four consecutive fiscal years, from 2008 through 2011, while GT India’s violations occurred for the 2013 fiscal year.

Without naming the client, SEC said that ‘Client A’ began restructuring itself in early 2012 in preparation of a planned initial public offering in the US.

On February 15, 2012, it engaged GT India to audit the financial statements of Client A’s core operating company for each of the three years ended March 31, 2010, 2011, and 2012.

On February 20, 2012, Client A incorporated what would become a public holding company.

On June 15, 2012, GT India completed its audit of Client A’s financial statements, which at the time was not registered with SEC. GT India issued an audit report dated June 15, 2012 with an unqualified opinion for each of the three fiscal year ended March 31, 2012.

About one month later, a Client A employee asked an associate tax director from GT India to recommend a company that could incorporate a Mauritius-based subsidiary as a final step in Client A’s restructuring.

The associate tax director of GT India, who was also a member of the audit engagement team, contacted a partner of GT Mauritius seeking a recommendation. Shortly following this discussion, Client A retained Anex, a corporate services company located in Mauritius, to incorporate and manage its new Mauritius subsidiary.

Anex later incorporated a Mauritius subsidiary for Client A and appointed its co-owners who were GT Mauritius partners, to its board.

In October 2012, Client A completed its IPO and moved USD 100 million worth proceeds to this subsidiary to purchase a controlling interest in Client A’s operating company.

Grant Thornton India subsequently audited Client A’s 2013 financial statements. However, SEC found that GT India was not independent.

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