Quality of Audits is “Unacceptable”

By Graham Hambly for PQ Magazine

The FRC is far from happy with the quality of big firm audits. PQ magazine’s Graham Hambly explains why

The number of inspections may have been down, because of Covid-19, but the number of audits requiring more than limited improvements remains unacceptable, says the Financial Reporting Council.

It’s inspection work at the seven largest audit firms found 33% (29 out of 88) of their audits didn’t meet expected standards.

Firms have made some improvements and FRC has observed good practices, for example there was better group audit oversight, and effective integration of specialists into the audit team at some firms. However, And they are “still not consistently achieving the necessary level of audit quality”.

The FRC is now calling on them all to “make further progress”.

FRC said that improvements are needed in the same three audit areas: impairment of goodwill and intangibles; revenue and contracts; and provisions, including loan loss provisions. Nearly half (46%) of all ‘failings’ have been in these areas over the last three years.

The worry for the FRC is auditors are still not challenging, or standing up to management in areas of complexity and forward-looking judgement. Other audit areas in which it found faults in more than one firm this year include: audit of inventory, group oversight, going concern and investment property valuations.

The accountancy watchdog reiterated that it will take robust action for all reviews deemed to need improvements or significant improvements. To date, for the past three inspection cycles, it has referred 28 audits across all firms inspected, for consideration of possible enforcement action.

FRC’s David Rule said: “We are concerned that firms are still not consistently achieving the necessary level of audit quality. The tone from the top at the firms need to support a culture of challenge and to back auditors making tough decisions.”

ICAEW’s COO, Vernon Soare, said: “We are disappointed by the overall results, and support efforts to drive up standards across the largest firms.”

He stressed a robust professional scepticism is vital to delivering high quality audits, however recent events have reinforced the need for a broad focus on internal controls, fraud and viability, which are critical to assessing whether a business is honestly run and has a future.

He went on: “Audit Committees also have an important role to play in challenging management, in addition to selecting auditors who will do the same, as the BEIS Select Committee has highlighted.”

How the seven top accountancy firms faired, on inspection:

Grant Thornton: 9 inspections, with 44% (4) requiring improvement or significant improvements. That means 5 (56%) required no more than limited improvements.

KMPG: 18 inspections with 39% (7) requiring improvement or significant improvements. That means 11 (61%) required no more than limited improvements.

BDO: 8 inspections, with 37.5% (3) requiring improvement or significant improvements. That means 5 (62.5%) required no more than limited improvements.

PwC:17 inspections, with 35% (6) requiring improvement or significant improvements. That means 11 (65%) required no more than limited improvements.

EY: 15 inspections with 27% (4) requiring improvements or significant improvements. That means 11 (73%) required no more than limited improvements.

Deloitte: 17 inspections with 24% (4) requiring improvements or significant improvements. That means 13 (76%) required no more than limited improvements.

Mazars: 5 inspections with 20% (1) requiring improvements or significant improvements. That means 4 (80%) required no more than limited improvements.

Graham Hambly is the Editor of PQ magazine. See www.pqmagazine.com