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UK Regulator Criticizes Audit Quality

Global Glimpses | December 15, 2008

The UK’s independent audit regulator has criticized the quality of the audit work done by the Big Four accounting firms. The Audit Inspection Unit, part of the Financial Reporting Council, published its first “name and shame” reports on the quality of work done by the large audit firms recently. In the past, the AIU gave its findings to the firms privately and only published an overview report of audit quality that did not use their names.

Under its new regime, the AIU published detailed reports on the quality of work done by the Big Four plus Grant Thornton, BDO, and PKF. Overall, the regulator said the audits it looked at were “fundamentally sound,” but it had concerns about ethical conflicts and urged firms to provide more documentation to support key judgments. The reports were released just as the PCAOB pointed to audit deficiencies by the firms in the United States.

Among some of the findings: Ernst & Young and PricewaterhouseCoopers were criticized for allowing tax partners to provide tax advice to clients where they were also involved in the audit; Deloitte routinely used its clients’ internal audit staff to perform external audit work in the banking and retail sectors; KPMG did not keep good enough audit evidence “to reflect the extent of partner involvement in the resolution of key audit issues”; BDO had not always provided sufficient audit evidence to justify stock figures and Grant Thornton’s policy of rotating audit partners did not follow best practice.

PKF probably came in for the toughest criticism. The AIU had “significant concerns” about one of the five listed-company audits that it reviewed. “There was insufficient evidence on the audit file to support certain amounts and disclosures in the financial statements and material late adjustments to the financial statements,” the regulator said.

Each of the reports included a letter in response from the relevant firm. PwC argued that the regulator’s report supported the reliability of its audit opinions, but complained that its length and tone made it difficult for readers to understand the “overall positive conclusion.” PKF said: “we recognize that best auditing professional practice is constantly developing and, consequently, that continuous improvement is necessary on our part.”

In a statement the AIU said: “The quality of auditing in the United Kingdom remains fundamentally sound with no systemic weaknesses. However, [the reports] identify some important issues in certain areas in relation to which further improvements need to be made by the audit firms.