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Unacceptable audit standards

20th Jun 2017
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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.

Replies (5)

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paddle steamer
20th Jun 2017 14:38

To use your DAB analogy each preset would these days have a broad range of frequencies over which it could be received.

The difficulties re audit in the past, in my day ,used to mainly revolve around completeness, with some measurement issues, but the measurement issues were far more limited than today.

Whilst no longer doing any audit work it now appears to me the issue is far more subjectivity re measurement brought about by the complexities of modern business practices, organisations and financial products.

Now part of the issue appears to me to be due to the rules based complexity of current financial reporting standards and frankly castigating the auditing profession for playing catch up does at time seem to be beating the watchdog (not bloodhound) when the owner has failed to make it clear at times what the dog ought to be doing.

Thanks (1)
By slipknot08
21st Jun 2017 10:24

and beating up dogs (or any other animal, come to that) is BAD...

Thanks (1)
By lme
23rd Jun 2017 11:12

Thanks for a thought provoking article. I like the comparison to the DAB radio - certainly food for thought.

Thanks (0)
By ShayaG
23rd Jun 2017 13:27

I hate the way the FRC couches this in terms of "quality". The problem is "integrity." The problem is not a technical one. It's a fundamental human issue - you cannot buy integrity. If you challenge management too much they will find someone else. When your career is assessed (in reality, despite all the HR guff) pretty much exclusively on fee income billed, who would take that risk with their career?

Materiality is a fundamental exercise in self deception -
an excuse to look the other way for misstatements stakeholders would certainly consider material.

I'd like to know how many AWebers agree with my proposition: anyone carrying out audit with integrity will never make partner.

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David Kirk profile image
By David Kirk
25th Jun 2017 18:08

One particular area that definitely needs attention in auditing is that of tax liabilities. As far as I can see next to nothing is done in audits to establish that there are no additional PAYE or NIC liabilities, with results that are all too predictable. I am dealing with an employment status case at the moment where an arrangement has been left untouched that was set up 37 years ago, and the big firm that has done the audit has never looked at it since. As it involves one of the company's directors the amounts being claimed by HMRC are definitely material.

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