It is beginning to feel as if every year the Financial Reporting Council announces that the Big Four’s auditing standards are getting worse.
The 2017/18 report shows a 6% decline in audits that were either perfect or only needed limited improvements. As a result, less than three-quarters of audits hit a level that most of us would regard as being barely acceptable. The percentage for FTSE 350 audits is almost exactly the same as for those of smaller organisations, suggesting that the big firms hardly pull their fingers out to do a better job for their major clients.
The FRC’s report published on Monday specifically singles out KPMG for criticism. It observes that 50% of KPMG’s FTSE 350 audits required more than just limited improvements, and the Council is now going to subject the firm to increased scrutiny.
To put things into perspective, PwC had a 100% record in 2013/14 when it came to auditing FTSE 350 companies, which shows that can be done. They are also closer to the 90% target than most rivals, although last year they actually hit it.
Sometimes, writers can appear to repeat themselves and it would be lovely to be able to read next year’s report and say that, at long last, auditing standards have leapt up and exceeded the 90% benchmark set by the FRC. To this columnist, it is a mystery as to why what are presumably the very best auditors in the country are unable to get audits perfectly right, even allowing a margin for error which might come within the category of “limited improvements”.
Frankly, if any reader is running a practice which audits its clients so badly that half of its efforts need significant improvements, they should hang his or her head in shame and look for a career change in a hurry.
Is it just coincidental that KPMG was auditor to Carillion? The answer to that question is actually almost certainly “yes”. As we all know, there is a kind of auditing musical chairs going on and one unlucky firm happens to end up embarrassingly falling on the floor when a rogue client is discovered to have cooked its books prior to going into administration or liquidation.
Looking at the FRC report more positively, while the Big Four hardly covered themselves in glory last year, the four other firms under review all showed general improvements in the quality of inspected audits. Looking beneath the headlines, those improvements were minimal but any positive change should be welcomed, particularly at a time when their larger brethren are moving in the opposite direction, sometimes at a rate of knots.
The moral of this story should surely be that if accountants are not capable of auditing to at least a 90% standard, and preferably 100%, surely it is time for serious sanctions to be levied against them. To use an analogy the might seem appropriate this week, you have to imagine that Gareth Southgate would drop Jordan Pickford if he failed to save three attempts at goal out of 19, the PwC FTSE 350 statistic, while surely nobody would employ a goalkeeper emulating KPMG by letting in eight goals from 16 attempts, one of them so atrocious that it went trickled slowly between his legs.