FRC: Audit quality ‘could be better’ at big firms

Erik Khalitov
John Stokdyk
Editor
AccountingWEB.co.uk
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In its annual report card on the audit of FTSE 350-listed companies, the Financial Reporting Council said overall quality had improved, but “further action was needed” to deliver consistent quality.

Eight out of ten FTSE 350 audits reviewed in the 2016/17 report presented no significant issues, compared to 77% in 2015/16 and 70% in 2014/15. The FRC has set firms a target of 90% of FTSE 350 audits reviewed needing “no more than limited improvements” by 2018/19.

Every year the FRC’s Audit Quality Review team selects a sample of audit engagements for study at the top six accountancy firms and publishes its findings. This year PwC and EY emerged with satisfactory ratings from the review. All of the 27 audits selected at PwC and the 17 at EY passed muster.

Grant Thornton experienced the most issues during its review, with three of the firm’s eight audits reviewed requiring “significant improvements”.

In between these ends of the spectrum, KPMG and Deloitte both got “need improvement” ratings on two out of the 23 audits reviewed. For BDO, the figure was one out of eight.

Instructive reading

While occasionally painful for the firms involved, the individual audit review reports are instructive reading for anyone with an interest in audit standards and procedures. The FRC reviews detail the areas requiring improvement, where the firms have made progress on audit quality and the things that they are doing well.

At PwC, for example, the FRC reviewers noted, “We have seen an improvement in relation to most of the key findings we highlighted in last year’s report. However, we continued to identify some findings in relation to the audit of impairments and tax provisions and some of the firm’s independence procedures.”

EY’s individual report concluded, “We have seen an improvement in certain areas this year, in particular IT and other controls testing and the firm’s independence procedures. However, we continue to identify findings relating to the challenge of management, communications with audit committees and the audit of revenue.”

The areas requiring work at Grant Thornton included:

  • Ensuring compliance with the new ethics standards introduced last year, for example by testing individual partner independence and more timely consulting on non-audit fee ratios.
  • Paying more attention to audit quality and ethical requirements when promoting and appraising staff.
  • Challenging client management teams more effectively on impairment reviews and judgmental valuations. On two of the GT audits reviewed, the FRC team noted quality control weaknesses including inadequate assessments of the valuation evidence for loan notes and debentures and insufficient audit evidence for the recoverability of customer exposures.
  • More effective audit procedures relating to revenue.

Root cause analysis

Grant Thornton was given the opportunity to respond with explanations about how it was tackling the issues raised. The firm commented: “We are disappointed with the results of audits reviewed this year. This is not in line with the results of our most recent internal reviews or the previous year’s FRC review, but these are important findings and we take them seriously. We have undertaken root cause analysis of the individual file reviews and taken appropriate action.”

As a supplement to the annual audit quality reviews, the FRC also plans to publish an overall report on the quality of audit in the UK later in 2017.

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19th Jun 2017 13:44

The theory of audits is that they're impartial but the sums involved in fee income mean that there's a clear conflict of interest since any disputes are likely to result in organisations choosing a different auditor.

Until that conflict is removed we're going to continue to see large firms going bust when the last set of audited accounts showed no inclination that it was about to happen.

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By Ammie
20th Jun 2017 10:21

Very amusing, I must say. We are strangled with the most extensive audit and accounting regulations and recommended practice ever and yet audit quality is lacking!!

Just goes to show how effective the endless volumes of regulations are. We do love lots of bureaucracy, quite well paid I should imagine.

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