As Financial Times originally reported and we covered in early 2024, Grant Thornton UK got kicked off the esteemed top tier of the Financial Reporting Council’s audit inspection targets in 2023. You’d think we would have taken that opportunity to roast them for being not good enough to be on a list next to BDO, Deloitte, EY, Grant Thornton, KPMG, [Forvis]Mazars, and PwC but it was actually a good thing for them.
They didn’t get punted to Tier 2 because of years and years of worsening audit quality, they got punted to Tier 2 so they could continue to focus on audit quality and demonstrate that they belong with the big boys. As part of that effort, GT ditched a whole bunch of clients (FRC called this “de-risking its audit portfolio”), 70% of whom fell into the Public Interest Entities (PIEs) category. And this downgrade, according to a fresh FT story which says GT wants back on the top tier, led to some confusion in the market:
Despite the lesser scrutiny, the demotion became a handicap for Grant Thornton when competing for large audit mandates, according to people familiar with the matter, because prospective clients mistakenly interpreted it as a sign that the regulator viewed the firm as a lesser audit provider.
“Being placed outside the FRC’s top tier was, in practice, misread by some prospective clients as a league table position rather than a supervisory classification, which did create confusion in the market,” said Wendy Russell, UK head of audit at Grant Thornton.
In a FRC podcast released last year (thanks FT for linking this!), then-Executive Director of Supervision Sarah Rapson talked about how the tier system ended up telegraphing a signal that puts top tier audit firms above everyone else which the FRC totally didn’t see coming when they came up with tiers. “One of the areas that there is consensus over is the unintended consequences of how we currently segment the market,” she said, “So we group firms in tier, so we’ll have tier one, tier two, tier three, and every so often we might talk about tier four, which is a proxy for firms that could come into the PIE market but haven’t quite yet chosen to do so. And this has become a bit of a league table externally. Some firms have told us this actually has impacted their ability to compete, and that was never our intention. And I think it is important that, you know, the FRC isn’t in the way of a competitive market.”
I mean, they do understand the meaning of the word ‘tier’ right? The only way it could be worse is if they used letters instead of numbers.
Grant Thornton got into bed with private equity in 2024 and in the time since, they’ve been adding PIE clients to build that practice back up. Now, says FT, they think they belong back on the top of the list:
Grant Thornton has been pressing the UK accounting regulator to restore it to the top tier of audit firms, subject to the greatest regulatory scrutiny, as it attempts to repair its reputation and reverse a years-long retreat from the high-risk work.
The funniest part about this story is that the FRC might be getting rid of tiers altogether. But we suppose it’s that much more important to crawl your way back to the list before the list disappears and you’ll forever be trapped on a demoted tier that no longer exists in the minds of prospective clients.
