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Audit quality tanks again

Philip Fisher comments on the recently published FRC reports on audit standards and the disappointing results.

15th Jul 2020
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It is really depressing for a columnist whose special subject is supposed to be tax to find himself writing about auditing standards and the FRC two weeks in a row.

Having asked the question last week whether the FRC was wimping out of its responsibilities by introducing a new plan to divide audit from other parts of Big Four professional practices, without insisting that they are devolved completely and failing to extend even that limited plan to other firms, those wonderful league tables of audit shame have been published.

The results take the form of detailed reports that should be championing organisations on the top of their game which rarely if ever, fall below the highest standards.

Sadly, that never seems to be the case these days and this event has become an annual embarrassment, as the top seven firms fall over themselves to prove which has the lowest auditing standards.

Once again, Grant Thornton has managed to outstrip its rivals, which will hardly come as a surprise since only last week the firm was once again in the news for ethical failures in the audit of the failed off-licence chain Conviviality

For the avoidance of doubt, the percentages shown in the table below represent audits that required no more than limited improvement - ie were inadequate.

Table of Failure

Grant Thornton 45%
KPMG 39%
BDO 38%
PWC 35%
EY 29%
Deloitte 24%
Mazars 20%

Anyone interested in this topic can look at the reports in detail and will discover that standards have dropped considerably over the last few years, where the naïve might have expected them to improve as the FRC took appropriate action.

Astonishingly, GT actually improved on its performance compared with 2014/15, when 62.5% of audits were substandard. However, in 2015/16 that figure notably reduced to below 15%, but by last year bounced back to 50%. To compound this, in each of the last two years, half of the failures required significant improvements. Admittedly, the sample is relatively small but regular news headlines confirm that something appears to be seriously amiss.

At KPMG, the trend has been firmly downhill. In 2014/15, a relatively respectable 25% of audits gave no cause for concern, while last year the figure was a fraction lower than that with the good news that no audits required significant improvements, compared to approximately 8% this year.

Another worrying trend is the number of audits that require significant improvements. Again with a small sample BDO, whose record has been exemplary in the previous couple of years, saw 25% of its audits marked as severely failing this time around.

It would be lovely to be able to offer warm congratulations to Mazars and Deloitte for their epic performances. However, is it really right to celebrate “excellent” results that respectively represent, give or take the rounding, one in five audits failing and one in four audits failing?

In order to give the public confidence in the bodies that they oversee, the FRC should surely set the bar at no lower than 90% of audits being carried out without a need for significant improvement and, you could easily argue, 95%.

This begs the question as to whether the proposals last week, which require the Big Four to divide their organisations by 2024 are really adequate.

It is only seven days ago that this columnist asked this very question and concluded that the problems are likely to continue for the next four years and quite possibly into the foreseeable future.

We really do need to ponder on the prospect of either a complete division into completely unconnected corporate entities or, alternatively, nationalisation if audit standards are regarded as an option rather than a compulsion. Surely, we owe that to all of the stakeholders who have no other way of ensuring that their investments are secure.

The alternative would be to make auditors and, if they remain in the same organisation partners from other disciplines, personally liable for the losses that their failures cause.

The second issue that the FRC signally failed to address is the inability of the second tier to audit any better than the major players. Is the regulatory body really satisfied that almost half of Grant Thornton’s audits are inadequate, while BDO is not too far behind?

This writer is looking forward to swallowing his pride in a year’s time and reporting that no firm failed the 10% test. However, that may be pie in the sky.

 

Replies (4)

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By SAservices31
16th Jul 2020 10:33

Hi Philip

Very interesting article But let me add a solution to the problem - let ACCA monitor all audit work in the UK. Why? Because. ACCA would simply remove the registration of any audit firm that continually shows poor audit standards.

For some reason the big ICAEW firms are simply allowed to carry on so I would suggest the solution is the monitoring system itself?

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By johnt27
16th Jul 2020 10:40

It wouldn't make a difference because it's the FRC that monitor the big firms not the accountancy bodies...

Which, if this isn't known and understood within the profession, only adds to the audit expectation gap without...

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By johnt27
16th Jul 2020 11:04

I don't think separation of audit firms will make any difference to audit quality. Ironically, I think large audit firms should be closer to their clients rather than further away to aid their understanding of the business and really get into the nuts and bolts of the incredibly complex organisations they are auditing.

Longer reporting timetables would help auditors, although it doesn't help the markets, as this would remove some of the pressure these firms naturally have to deal with.

That and removing or reducing the gaping hole that is the audit expectation gap.

Audit quality isn't just a big firm issue - it affects all firms. It's just that the smaller firms don't find their names splashed across the tabloids and broadsheets because their clients aren't newsworthy enough, the impact of an audit failing is lower, and the local press rarely trawl the disciplinary pages of ICAEW/ACCA.

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By jon_griffey
17th Jul 2020 09:38

This is a persistent, ongoing issue and rather than just piling more regulation and tick boxes onto audit firms, there needs to be a fundamental rethink about the purpose and limitations of audit, or nothing will ever change. One of the first things to deal with is the irreducible conflict that the auditor is reliant on the client, i.e. the directors for their appointment and payment of their fees. How is increased competition in the audit market going to help this?

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