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Big Four audit failures

20th Jun 2018
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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.

Replies (3)

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By Justin Bryant
22nd Jun 2018 16:24

I think the only people who find these Big 4 audit failings surprising are those who have little or no experience of auditing (in Big 4 firms at least). If anything it's surprising there are not more such failings.

A good place to start fixing things would be to properly incentivise the Big 4 to do a proper audit job in the 1st place by not just giving them repeated slaps on the wrist (which merely incentivises them to just carry on doing rubbish audit jobs) like in the link below:

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Adrian Lawrence
By AdrianLawrence
22nd Jun 2018 13:39

Having regularly been audited by staff who explain that they graduated yesterday and this is their first day on the job (well exaggerating but you get the idea) it is not a particular surprise. But I can't help but feel a bit sorry for KPMG who are a good firm and on the receiving end of a lot of flack at present.

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By Colum
28th Jun 2018 12:01

This article seems like nonsense.
“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.”
What !!!???
Is this fake news ?
Firstly, the Times reported that KPMG audited Carillion since its creation in 1999.
Curious that the ‘rogue client’ Carillion paid so much to the big 4 firms and produced accounts which may have been misleading.
In the case of Carillion the ‘rogue client’ to whom the auditors addressed their report were the shareholders who were presumably misled by the accounts along with the government and all the rest of us, otherwise they would, like the ex FD, have got rid of their shares and not been shareholders. Their investments turned out to be worthless so why are they described in this article as rogue clients?
The author of this article appears to be mistaking the directors for the shareholders.
Perhaps they were rogue directors but we have to assume that they acted on the advice that they paid all the big firms for.
These were some of the techniques which are reported to have been used by the ‘rogue client’:

including profits from equity sales in public-private partnerships within operating profit — permitted but, if not a routine occurrence, something that should be separately noted in accounts;
• consolidating the results of joint ventures wholly into operating profit — also permitted, but under new rules that make it difficult to see joint revenues, costs and interest charges;
• taking out short-term loans with joint ventures to reduce net debt — regarded in the industry as “dark art”;
• using early payment facilities to improve supplier payment terms — a technique that both inflates cash inflows and hides true levels of debt.
Not to mention the Goodwill amounting to 1.6 bn that has evaporated
Never mind the reports that subcontractors were generally paid five months late ( perhaps described as ‘badwill’ in liabilities?)- which the hedge funds spotted as a sign that the company was bust well in advance of the auditors.
Is it possible that the £72 M reportedly paid by Carillion for professional advice was in connection with advising on these techniques?
Are we sure that the ‘rogue client’ were not just acting on advice from the big 4 all along? Or even that the ‘rogue client’ was deliberately created as a scam to take advantage of perceived weaknesses in government procurement, outsourcing and audit regulation that would be known to the big 4 but obscure and invisible to the government, the media and naïve general public.
To quote George Osborne ‘they are all in it together’
Here is the, not so complicated, balance sheet on page 45 of the accounts:
Balance sheet Summary of the Group’s balance sheet 2016 £m 2015 £m Property, plant and equipment 144.1 140.5 Intangible assets 1,669.3 1,634.2 Investments 180.3 165. Inventories, receivables and payables (347.3) (379.2) Net retirement benefit liability (net of taxation) (663.2) (317.6) Other (34.4) (56.7) Net operating assets 948.8 1,186.4 Net borrowing (218.9) (169.8) Net assets 729.9 1,016.6 (1)
However, the FT reported that when Carillion was liquidated on January 15 it had just £29m in cash and £7bn in liabilities.

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