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BDO and Mazars slammed for ‘unacceptable’ audits

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The accounting regulator has criticised BDO and Mazars for “unacceptable” audits, finding that they’ve grown too fast, without adequate controls and picking up higher-risk audits dropped by their peers.

20th Jul 2022
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The latest audit quality review released today has highlighted concerns at the fast-growing challenger firms, after their inspection results came out worse than last year and suggest an “unacceptable” downward trend. 

The Financial Reporting Council (FRC) found that the poor audit inspection results in 2020/21 continued in 2021/22, with 38% of Mazars’ audits requiring significant improvements, while 42% of the audits assessed at BDO required significant improvements.

Overall, 75% of the audits inspected of the largest audit firms (BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC) were good or required limited improvement – with five firms having no audits requiring no significant improvements. 

This is an improvement on last year’s quality inspection, where 71% of audits got the regulator’s stamp of approval and 67% in 2020. 

“While it is encouraging to see some improvement in audit quality at the largest audit firms, consistent, long-term improvement is still required across the market,” said FRC chief executive Sir Jon Thompson. “We will monitor closely the potentially negative impact on the public interest that the de-risking by firms of challenging audits may have on audit quality. The FRC will continue to build on our assertive supervisory approach to ensure firms are consistently delivering high-quality audit that will drive increased choice and resilience in the market over time.”  

BDO and Mazars

Of the 96 individual audits checked by the seven tier one audit firms, the FRC gave the biggest bruising to BDO and Mazars

“These firms have been growing too fast, picking up higher risk audits being dropped by their peers, without adequate controls to ensure high-quality audits,” concluded the regulator. 

Both firms were warned last year to “put in place additional measures to support high-quality audit as they continue to grow”. But the FRC found the results have again been “unacceptable”. 

“BDO and Mazars continue to grow and, given this and the results of their inspections in 2020/21, we again increased the sample of audits we selected for review at each firm.” The FRC increased the sample of audits for both firms and found that four of the eight audits reviewed at Mazars and five of the 12 audits reviewed at BDO needed more than limited improvements, while three and four audits at Mazars and BDO respectively needed “significant improvements”.

“These results are worse than last year and suggest a downward trend which is unacceptable,” said the FRC.  

For BDO, the FRC said: “So far, the firm’s efforts have not produced the desired or intended results and there have been recurrent key findings which the firm’s actions have not adequately addressed.”

The regulator has highlighted the audit of revenue, the audit of financial services entities, and challenges in key judgment as areas that have led to the low grades. It said the challenger firm should focus on improving quality control on engagements.

As for Mazars, the FRC has recognised growth as being a significant area “where the risks have not been properly understood or controlled”, alongside slow progress on previous findings, as the “primary underlying root causes” for the individual audit inspection results this year. 

In response, the FRC will increase the number of audits for both firms, and has advised the firm to strengthen processes for quality control, to further consider the audit clients’ take on processes and the resourcing to respond to higher risk audits. It also should develop approaches to manage growth and the effectiveness of its audit portfolio. 

Mazars said it is “disappointed” by the findings in this year’s FRC public report. “We are committed to addressing the issues that have been identified as part of our continuous quality improvement plan. Mazars is dedicated to quality; it is central to our values and strategy. We will continue to invest in, and focus on, applying the highest quality standards in our work,” a spokesperson at the firm said. 

KPMG and banking audits

KPMG came in for the most stinging criticism last year. The Big Four firm was told that improvements were required in the audits of banks and similar entities. 

This year the FRC has kept its focus on this area, and the results of the inspections have seen significant improvement. In 2020/21 the inspections found that 59% of audits required no more than limited improvements, but this year that number had increased to 84%.

While the regulator acknowledged that this is “encouraging” and signals that the firm has invested in initiatives to improve audit quality and that its culture change programme is having an impact. But the FRC was also quick to point out that this “is not yet a trend”. 

The regulator still finds issues relating to banking audits, and while these were less severe than last year, it will continue to monitor the Big Four firm and look for further improvements in its 2021 year-end audits of banks. 

Improvement at Big Four

Elsewhere, the report found that all tier one audit firms are investing to improve audit quality, with the FRC highlighting how firms have rolled out culture programmes and developed their individual audit quality plans and root cause analysis (RCA) processes.

The regulator has also seen investment and improvement in areas such as technology, new audit systems, data analytical tools and developing AI tools. Firms have also invested in recruitment and are adopting alternative solutions such as offshoring and virtual secondees. 

As for the other tier one audit firms, EY results declined year-on-year, especially with non-FTSE 350 audits. However, the FRC said it is too early to determine whether this is a trend. 

Individual audit inspections at Deloitte, Grant Thorton and PwC all exceeded 80% and improved on the previous year. While this is a positive trend, the FRC isn’t content just yet. “There is, however, more that can be done by these firms to achieve continuous improvement and risks for them to manage such as shortage of resources,” explained the report. 

The FRC will continue to monitor tier one firms and pay particular attention to their efforts in solving insufficient resources.

Replies (9)

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By Hugo Fair
20th Jul 2022 19:22

If we are expected to share in the "highlighted concerns at fast-growing challenger firms" ... then how are we supposed to feel about the never-ending stream of failures and penalties within the largest audit firms?

And does no-one care about the public perception of greed & dishonesty pervading one area of the accounting profession that the general public doesn't recognise as separate from the other areas?

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By Hometing
21st Jul 2022 09:15

At this point we may as well just publish a more concise list of audits done well

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By Hometing
21st Jul 2022 09:15

At this point we may as well just publish a more concise list of audits done well

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By Hometing
21st Jul 2022 09:15

At this point we may as well just publish a more concise list of audits done well

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Replying to Hometing:
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By SJH-ADVDIPMA
21st Jul 2022 10:50

Is there a commission earned on replies?

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By Paul Crowley
21st Jul 2022 09:43

Small firms that do 'bad audits', despite getting the accounts correct and client surviving end up edged out of auditing. The kind of audit where the shareholders run the company as a full time job and know exactly what is going on and where the real risks are.
Nothing much happens at the other end when big firms charge massive fees but fail to protect the shareholders

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By listerramjet
21st Jul 2022 10:42

nothing quite like washing your dirty linen in public to knock public confidence!

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By Rgab1947
21st Jul 2022 11:20

Another audit firm, another failed audit, another fine.

Does not stop it would appear.

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By ireallyshouldknowthisbut
21st Jul 2022 17:11

Aren't they just learning how to do it like the big boys?

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