Grant Thornton is to pay a £1.3mn penalty over “serious failings” in its auditing of retailer Sports Direct, the accounting regulator said on Monday.

The findings related to Grant Thornton’s audit of the sports goods chain, now Frasers Group, for the 2015-16 and 2017-18 financial years and the work of Philip Westerman, the partner in charge of the audits. Westerman, now a former partner of the UK auditor, faces a penalty of nearly £80,000, it added.

The auditor and Westerman were issued severe reprimands over their handling of the two years’ audits. Grant Thornton will have to report to the Financial Reporting Council on its work to improve auditing standards.

The findings related to the failure by either the firm or Westerman to establish that Delivery Company A, a group involved in many of Sports Direct’s transactions, was a related party.

The regulators’ executive counsel made no finding as to whether there was a related party transaction, Monday’s statement said.

The FRC said that, while the respondents identified related parties as “an area of significant risk” for the audit, they failed to treat with “professional scepticism” management’s assertion that Delivery Company A was not a related party of Sports Direct.

“There were a number of relevant factors which should have prompted the respondents to consider and follow up matters further, but they did not,” the council said.

The findings against the firm and Westerman concerned “basic and important requirements” that were “fundamental to the work of an auditor”, the FRC said.

“As a result of the adverse findings, both the 2016 and 2018 audits failed in their principal objective of providing reasonable assurance that the 2016 and 2018 financial statements were free from material misstatement,” the council said.

The penalties against Westerman total £79,575.

Grant Thornton said it was pleased to conclude the “long-running matters”.

“Having invested significantly in the quality of our audits since this time, we have seen a marked improvement in our results and are confident that the issues identified by the FRC’s investigations . . . are not reflective of the work we produce today,” it said.