BDO and Mazars singled out again for ‘unacceptable’ auditsby
The accountancy watchdog has criticised audits from BDO and Mazars for being “unacceptable” for the second year running as part of its annual Audit Quality Review (AQR) of tier-one audit firms.
BDO and Mazars came under fire today after the Financial Reporting Council singled them out again for ‘unacceptable’ audits. However, it wasn’t all bad news for the firms, as the watchdog acknowledged they had both shown signs of improvement on last year's performance.
Of the audits assessed, 69% of BDO’s required no more than limited improvements, with two audits inspected requiring significant improvements, while 56% of Mazars’ audits required only limited improvements.
This is an improvement on last year where 38% of Mazars audits required significant improvements, while 42% of BDO’s were flagged as requiring improvements. As a result of last year’s poor results, the FRC increased the number of audits inspected at both firms.
Last year, the FRC pulled BDO and Mazars up for “growing too fast, picking up higher risk audits being dropped by their peers, without adequate controls to ensure high-quality audits”.
Despite the improvements, the two audit firms still trailed other tier-one auditors Deloitte, EY, Grant Thornton and KPMG. The FRC found that 77% of the audits were deemed “good” or requiring “limited improvements”. The FRC noted that this audit quality metric has increased by 10% over the past four years.
With five of the largest firms having audits that didn’t require any significant improvements, the FRC’s deputy chief executive Sarah Rapson said was "encouraging to see the ongoing and consistent improvement in audit quality at the largest audit firms.”
While the FRC was mostly encouraged by the results of all the Big Four, KPMG was singled out as having had one audit inspected that required significant improvements - up from zero last year. And despite being in the most "in the most favourable position across the Big Four firms" after last year's review, KPMG saw the proportion of audits requiring no more than limited improvements decrease from 84% to 74%.
BDO under audit scrutiny
For BDO, the FRC this year recognised that the challenger firm’s commitment to strengthening audit quality infrastructure had “intensified”. However, the regulator noted that this investment and enhancements had “not yet had the opportunity to fully embed and impact inspection results”.
In addition, the FRC found audit of revenue, audit of financial services entities, scepticism and challenge in key areas of judgement, journal testing, and quality control and review as recurring areas in need of improvement still from the prior year.
In a statement, BDO’s head of audit Scott Knight pointed out that the inspection shows an improvement on its 2021/22 scores, but also expressed his disappointment that there are recurring findings. “We knew our investments and enhancements would take time to fully embed and impact our inspection results.
“Ensuring we consistently deliver high-quality audits to PIEs and across our entire portfolio is our top priority. We have made significant investments in audit quality, adding capacity and capability to the audit team, including the addition of 700 people and almost 40 new partners over the last two years.
“While progress has been made to date, we are not complacent and recognise there remains much to do. The entire audit practice and the firm’s leadership team are committed to our audit quality transformation programme, and we will continue to regard it as our highest priority.”
Mazars needs to take urgent action
Meanwhile, the UK regulator recognised how Mazars had “invested heavily” in audit quality through the launch of a number of initiatives, but it noted that probably won’t be until 2024 or 2025 before they start to see any positive impact on the inspection results.
The FRC said the changes were encouraging but added that the urgent action taken by the firm must be effective and embedded in a short timeframe, at a minimum to impact December 2023 year-ends.
A spokesperson from Mazars said: “Quality is a central pillar of Mazars’ values and strategy, and our objective is to deliver the highest quality standards in our work.
“While we are disappointed with the number of audits requiring improvement in the AQR’s annual inspection covering the period to March 2022, we are encouraged by evidence that actions taken since FY21 have started to have a positive impact on quality and that no audits were found to require significant improvement.
“We remain committed to the PIE audit market and to building upon this positive momentum, with sustained investments in resources and processes to deliver consistently excellent audit quality”.
Of the seven tier-one audit firms, Grant Thornton was top of the table with 100% of its audits requiring no more than limited improvements. This is the second year in a row that Grant Thornton emerged from the audit quality review inspection completely unscathed.
The FRC did emphasise the importance for Grant Thornton to remain focused on quality and “guard against any risk of complacency”. The FRC has reallocated Grant Thornton to tier two.
PwC’s audit failings hit the news recently after picking up a £7.5m fine for the audit of Babcock in 2017 and 2018, but the regulator concluded after this year’s audit quality inspection that the Big Four firm has demonstrated continuous improvements to audit quality and culture, which has led to creating capacity and talent retention. As a result 82% of audits only needed limited improvements - which is not too dissimilar to last year’s 83%.
Although PwC has made progress, the FRC pointed out that the Big Four firm still required improvements with cash and cash flow statements and revenue and profit margin recognition.
It was also positive news for EY, where 80% of the audits inspected needed only limited improvements and none required significant improvements. However, the FRC flagged the area of deferred tax and other certain other assets as requiring improvement.
Meanwhile, 82% of Deloitte’s audits were judged as needing no more than limited improvements, which is the same as last year. The FRC reported that Deloitte has continued to invest in resources, culture and in embedding the ‘continuous improvement group.
Last year KPMG was told to improve the audits of banks and similar entities. The FRC reiterated that message this year, in particular the area of expected credit losses, but the Big Four firm’s investment in the audit of this area has resulted in “specific improvements in the quality of output and the attitude of partners and staff”.