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BDO auditor dismissed after altering audit file

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BDO has sacked an auditor after they changed an audit file when they learned the regulator was investigating one of its public audits. 

 

3rd Nov 2022
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The Financial Reporting Council (FRC) revealed in the local audit inspection report “significant weaknesses” in the BDO audit team’s documentation, archiving and engagement. It emerged that a member of the team changed an audit file of an unnamed public body after they were notified of the regulator’s inspection. 

The auditor lost their job after an investigation as the challenger firm came under fire in the report after a Value for Money (VfM) arrangement and a financial statement audit was flagged as requiring “significant improvements”. 

The FRC said, “It is unacceptable that two inspections were assessed as requiring significant improvements. Urgent and robust action is required to address these findings.” 

Responding to the auditor changing the VfM audit, BDO commented in the inspection report: “On learning that changes had been made to working papers by a member of staff we immediately carried out an urgent investigation into the matter, under the overall direction of the firm’s leadership team. 

“The individual concerned was suspended within three days of the FRC querying the matter with us and dismissed following completion of the investigation.”

Auditor changed document

The auditor was able to change the working papers because the files were not archived. This has always been the case with all financial statement audit engagements, but the policy in place at the time did not explicitly say that VfM files had to be archived, too.  

BDO’s policy has now changed to include all VfM arrangement assessments for periods beginning on or after 31 March 2022.

In the regulator’s key findings, the FRC reported that BDO did not know the file had not been archived. The regulator also pulled up the challenger firm for incorrectly informing the FRC that the file had been archived before it was selected for inspection.

After an internal investigation, which included reviewing other VfM engagements from the public sector and looking for evidence of late amendments, BDO concluded that this was an isolated incident. 

BDO also added that from Q4 2022, the firm will “implement central oversight and monitoring of all signed opinions and conclusions to ensure timely completion of the corresponding work paper files”. 

The FRC told the firm to take “urgent and robust action” in response to the findings and perform a full root-cause analysis for each inspection assessed as requiring significant improvements and to consider other areas of concern from its internal monitoring. 

BDO inspection

BDO controls 21% of the market share of major local audits, with 21 within scope of FRC’s Audit Quality Review (AQR) inspection. Of the two financial statements audits inspected, one required significant improvements; while one VfM also was flagged as needing significant improvements. 

For the financial statement audit that needed significant improvements, the inspection found insufficient justification to support modification of the audit opinion and that the impact of unadjusted audit differences was not considered on each line item in the financial statements. 

Carillion audit

The news of the BDO auditor amending documents comes after KPMG was fined £14m earlier this year for falsifying documents during the Carillion audit. 

Pratik Paw, the junior KPMG auditor at the centre of the FRC tribunal, was spared a professional ban after allegedly creating false minutes on the instructions of his boss. However, senior partner Peter Meehan, who led the audit of Carillion, was excluded from membership of the ICAEW for 10 years and fined £250,000.

Unlike the KPMG and the Carillion documents, it was a member of staff and not a partner implicated in amending documents. 

Local auditor report

The story of the BDO auditor was from the recent FRC inspection findings of the major local government audits in England

The FRC reported that improvements had been maintained, but 30% of the financial statements audits were not up to standard and the regulator also flagged the long-running issue of delays in filing public-sector audits. 

“Concerted action is needed from all parts of the system for local government financial reporting and audit to urgently improve matters,” commented FRC’s executive director of supervision, Sarah Rapson. 

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Replies (7)

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By tedbuck
03rd Nov 2022 12:32

I wonder how long it will be before auditors decide it isn't worth the candle and resign en masse.

I suppose the fees are too large but the damage being done to our profession suggests that a better answer is required than that which is here now.

My audit experience years ago suggested even then that it was mostly a whitewashing exercise but once records became 'digital' peoples' ability to connect with reality was moved one more step away.

A lot of the major errors/frauds recently have arisen from digital errors/fraud (Carillion, Tescos. Pat Val and so on) which really emphasises the difficulty. It isn't going to be solved easily and setting luck aside it is difficult to see how some of the errors just won't continue unspotted if the in house people turn a blind eye.

Even in small businesses where there is no audit it can be difficult to see reality when it is hidden in Xero bookkeeping because everyone's assumption (HMRC especially) is that if it's on the computer it is right. Much easier to spot the errors in a business with a turnover of £100K than in one with a Turnover of £100 millon.

It really does need a complete rethink of the whole concept of auditing or we will have more and more of these cases. Still it will produce more fines to fund the ICAEW and the FRC so they will be happily preening themselves.

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Replying to tedbuck:
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By Justin Bryant
03rd Nov 2022 14:02

The real problem is that the incentives are all wrong e.g. if NAO was auditing large private firms I'm pretty sure they would be qualifying their reports left, right & centre. Similarly, that's why auditors do DD reports totally unlike the way they do audit reports i.e. just like NAO they are more than capable of identifying problem issues when properly incentivised to do so.

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By Mr J Andrews
04th Nov 2022 14:33

Good to see the policy has changed. Does this mean the end of unreliable audits I wonder ? I doubt it .

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Replying to Mr J Andrews:
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By Paul Crowley
04th Nov 2022 17:15

Time to nationalise auditing
It could not get any worse, could it?

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Replying to Paul Crowley:
paddle steamer
By DJKL
05th Nov 2022 18:51

It could, it really could.

Not convinced a government agency, regulated either directly or indirectly by politicians , actually conducting the work,would do any better.

I think step one is ring fencing auditing in distinct audit firms,.

Then changing who auditors are appointed by and can be fired by might be a decent next step.

If auditors were legally to report to a board of auditing who allocated the pool of auditors to the clients and had fixed criteria for setting audit fees , and too many adverse reports got firms being unable to work in the industry, perhaps standards might improve.

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Replying to DJKL:
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By Paul Crowley
05th Nov 2022 21:38

'If auditors were legally to report to a board of auditing who allocated the pool of auditors to the clients and had fixed criteria for setting audit fees , and too many adverse reports got firms being unable to work in the industry, perhaps standards might improve.'

What is needed is audit reports that say something useful. ( I know you meant reports of bad auditing)
The persistent suggestion that a going concern referred to in an audit report just
brings forward the demise of said company is surely the point. Current system encourages auditor to close eyes hoping for more future fees.

The directors have a vested interest in looking for auditors that believe their fanciful forward projections and take a Nelsion view

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Replying to Paul Crowley:
paddle steamer
By DJKL
09th Nov 2022 12:32

The removal of low fee offers or compliance with the board's needs being to the auditor's advantage, is to me key.

If company boards did not set fees, did not remove auditors, but instead some HMG Authorised Board of Audit allocated audits to firms (Like the FA Cup draw), set audit fees, and removed auditors for poor work, the relationship between auditors and the entities they audited would change.

There might even be a back up fund via a levy on all audit fees charged to help deal with audit disasters.

It goes without saying that audit costs would increase but if that eventually means greater trust in audited accounts that might well be a price worth paying.

Regarding what audits reports say maybe the sort of graduated report, like the Care Inspectorate offer, might be worth considering, whilst a not prefect score re some compliance issue is not great it gives the entity suggested focus for improvement over the next year, this might be a way of highlighting failings (internal control/management pressures etc) in a less binary manner.

All this is musings, the last time I worked on an audit was mid 90s so frankly I know little about how audits are now conducted, it just seems commonsense to arms length auditors and the audited.

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