A third of UK audits are unsatisfactory: FRC

In its latest audit inspection findings published during the third quarter of this year, the Financial Reporting Council (FRC), said there are 10 per cent more audits that need vast improvements compared to last year. A third of the 88 reviewed are “unacceptable” said FRC, which scrutinised audits by the UK’s top seven firms between 2019 and this year included PwC’s audit of Nationwide Building Society, KPMG’s audit of Ted Baker, Deloitte’s audit of William Hill, EY’s audit of Aveva and Grant Thornton’s audit of Iceland super markets.

The audits were inadequate because of insufficient work areas relating to challenging loan provisions, insufficient assessment or challenge of companies’ cash flow projections, and a lack of evidence in how revenues were verified. The annual inspections by the accounting watchdog are a measure of the quality of audit work for listed companies, conducted by the UK’s top auditors.

The FRC’s executive director of supervision David Rule said: “We are concerned that firms are still not consistently achieving the necessary level of audit quality. While firms have made some improvements and we have observed instances of good practice, it is clear that further progress is required.”

Audit quality has come under fire following EY’s work for the collapsed payment company Wirecard, adding to the series of recent high-profile corporate failures, including Carillion, Patisserie Valerie and Thomas Cook. The leadership at the accounting firms was also a point of focus. “The tone from the top at the firms needs to support a culture of challenge and to back auditors making difficult decisions’’, Rule added.

To help tackle these shortfalls, the regulator plans to increase the watchdog’s proactive supervision of the larger audit firms, enhance sector transparency by publishing key findings of their individual audit inspections and strengthen its Audit Quality Review team so that it can increase the number of inspections it completes each year.

Responding to the FRC’s report, Stephen Griggs, deputy CEO and managing partner of audit and assurance at Deloitte UK said the firm acknowledges that “we must continue to improve to ensure we consistently deliver the highest quality audits”. He said improvement of technology and processes would be a key element of this.

EY’s UK head of audit, Andrew Walton, said: “We are disappointed our overall results are not higher and we have plans in place to address the FRC’s feedback. This year, we are launching a redesigned audit quality strategy”, including investments in data-driven audit processes, additional training and “a culture of professional scepticism”.

On KPMG, the report added the firm needed to improve on its audit work for banks, with a focus on expected credit losses and financial contracts. KPMG was contacted for comment. Meanwhile, Head of audit at PwC, Hemione Hudson, said the FRC’s results related to audits completed before PwC had launched a three-year improvement programme and said the firm was “pleased the FRC recognises improvements we have made”.

The regulator added that its recently announced four-year deadline for the Big Four to separate their audit businesses from the rest of their advisory work would also help firms to achieve the high audit quality it expects. However, critics branded the announcement as “utterly inadequate” and incapable of creating effective change.

The report also highlighted a case where a partner who was given oversight of the audit of a company was “not sufficiently involved” in the review process of the audit. Four of the audits failed to challenge management’s cash flow forecasts and were criticised for not going into the granular detail needed to evaluate cash flow predictions. (The writer is our foreign correspondent based in the UK)

Andy Jalil

andyjalil@aol.com