The latest annual publication from the Financial Reporting Council suggests that the top six accountants still have much work to do before their audits are consistently adequate, let alone good.
It seems amazing that accountants can get away with carrying out sub- standard audits, given the consequences when they get it wrong. All it takes is a quick mention of Arthur Andersen’s and Enron, both defunct to send a chill down this writer’s spine.
The FRC’s latest report is a sad indictment of shoddiness. It tries to spin a positive out of the fact that 81% of FTSE 350 audits reviewed in 2016/17 needed no more than limited improvements.
While this is better than the previous two years, it does mean that one in five audits needs noticeable improvement, which is a disgrace.
The Council particularly focuses on problems at Grant Thornton, where out of eight audits reviewed a mere three needed only limited improvements. Two others required substantive improvements and three more significant improvements. In other words, 62.5% failed to achieve what most stakeholders would regard as a very basic goal.
It is still unclear to this columnist how large firms of accountants can manage to carry out audits that are not close to perfection. They employ some of the brightest people in the country, have the best technology available and probably average a century of experience in a field that should not be that tricky.
It is not as if an audit has to prove that the underlying figures are correct. All that an auditor needs to do is confirm that the underlying numbers show a true and fair view of the company’s or group’s affairs.
The report identifies some of the basic failures. “Key areas identified by the FRC where further improvement is required and the firms plan actions include:
Challenge of management in key areas involving judgment, such as impairment reviews, asset valuations and provisions.
The design and execution of audit procedures relating to revenue recognition.
Systems and arrangements for ensuring compliance with ethical and independence requirements.”
The FRC has set a target for next year at 90% of audits that are either good or require only limited improvements. If that means that shareholders in 10% of the companies reviewed are going to have to accept audits where improvements or significant improvements are required, the FRC should be hanging its head in shame. More to the point, one wonders whether the practices carrying out these audits should be repaying the often exorbitant fees that they charge for work that does not do the job.
To use a simple retailing analogy, if I went into a selection of department stores and purchased 10 DAB radios in each, I would not expect the average position to be that only eight of them worked perfectly, one would have several channels missing and the last no DAB. Worse, if GT was (say) the Debenhams of the accounting world, three of the radios would have no DAB stations, while another two would have noticeable gaps.
I want to be proud to be an accountant and reading reports of this type makes me wonder whether it might be better to pursue a career in politics or estate agency.