Is audit really that hard?by
Philip Fisher takes a look at the FRC's annual review of audits and finds little to offer comfort. Is auditing really that difficult?
Has it ever occurred to you that the major firms of accountants must be the unluckiest organisations in the world?
How else can you explain the announcements year after year from the Financial Reporting Council (FRC) that its random selection of audits to test have proved embarrassingly substandard?
Conspiracy theorists might take a different approach concluding that the FRC has cleverly infiltrated whistleblowers into each of the major firms of accountants with the sole purpose of getting leads on the only audits that were not pristine masterpieces which could be used as exemplars for those wishing to perfect the art form.
If neither of these explanations is correct then the leaders of our profession don’t seem to have the faintest idea about how to carry out reliable, professional and effective audits consistently.
Another embarrassing report card
Each summer, just as the media is entering what is known as the “silly season”, grateful journalists have the opportunity to write scathing articles drawing data from FRC’s annual audit reviews of those top seven practices. While, in the past, every firm has delivered results that should be regarded as unacceptable, this year there is a single exception, with Grant Thornton emerging from the audit quality review inspection completely unscathed.
It would be shocking enough for this to happen on an occasional basis, anyone can have a bad day, but the major firms manage it year in, year out.
Perhaps the first explanation above is correct. Out of thousands of impeccable audits, the FRC just happened to stumble on the half-dozen duds every single year.
If you believe that, you will probably be voting for Boris Johnson as the next leader of the Conservative Party on the basis that, like George Washington, he cannot tell a lie and is grossly misunderstood.
Impact on the reputation of the profession
A measure of laxity in the FRC’s reviewing policy seems apparent since the body doesn’t even distinguish between a good audit and one in which limited improvements are required. Surely, a good audit is a good audit, not one requiring even limited improvements? Looked at from a different viewpoint, why bother to identify audits requiring limited improvements if they are good?
The 2022/23 statistics could well lead to that favourite party game, in which accountants pretend to be used car salespeople or confidence tricksters in an attempt to attain a veneer of respectability.
When is the FRC going to take substantive action? If audits are carried out this badly on a long-term basis, then perhaps it is time to withdraw auditing licences from firms whose work is unsafe.
Too big to fail?
That just isn’t going to happen. If every firm that underperforms was kicked out, there would be nobody left to carry out large audits.
As Richard Hattersley’s article on the latest report identified, the biggest miscreants this time around according to the FRC are BDO and Mazars.
Those who have been following the repeated attempts to improve the quality of auditing might recall that one of the solutions put forward involved forcing big four firms to share audits of large quoted companies with those in the next tier down. Given this latest thumbs down to two of the major players in that group, is such a move really a good idea?
Some of the statistics still beggar belief, even if there have been minor improvements in recent years. To pick a few choice disasters:
- One quarter of all audits reviewed required more than limited improvements i.e. they were a long way from the required standard.
- Nearly half of Mazars’ and one third of BDO’s audits required more than limited improvements.
- Close to 20% of FTSE 250 audits required more than limited improvements.
- For the first time in three years, one FTSE 250 audit required significant improvement. This suggests that it was quite probably not worth the paper that it was written on or the hefty fee charged.
- Three times as many FTSE 100 audits required improvement compared with the previous year.
It was also worrying to see that despite investing heavily to improve audit quality, recommendations for Mazars from the FRC said that they should:
- Increase the focus on the firm’s ethics function and the changes being made in response to the findings.
- Review and assess the adequacy of the firm’s portfolio review, its related risk assessment and risk panels or other predictive audit quality actions.
More positively for Mazars, in 2021/22 over one-third of sampled audits required significant improvements, this time there were none.
A look at the FRC report shows that on a firm-by-firm basis, there are some small but possibly encouraging signs of hope.
In particular, we applaud Grant Thornton who have been relegated from Tier 1 to Tier 2. This might sound bad in footballing terms but actually means that following a 100% success rate in the latest review, the firm will require less supervision going forwards. Let’s hope that they thrive under the new, more relaxed regime rather than striving for promotion back to the bad boys’ league.
The report paints a worrying picture
This data is a sad reflection on the reputation of the UK’s seven top firms and the regulators who are supposed to govern their auditing quality.
Given the past history, the expectation has to be that the 2023/24 report will once again hark on minor improvements while around a quarter of all sampled audits turn out to be inadequate.
In passing, it is noted that the government’s attempts to replace the FRC with a new, more effective body, ARGA seem to be advancing at a snail’s pace. Perhaps when the change finally comes through, the new body will take substantive action to turn things around. Don’t hold your breath.