Improvements at KPMG resulted in each of the four largest audit firms returning no audits requiring significant improvement during an inspection cycle for the first time in the last five years, according to the U.K. Financial Reporting Council’s (FRC) latest quality review results.
Deloitte, EY, KPMG, and PwC were each praised for the positive results of their reviews, along with Grant Thornton UK. BDO and Mazars, meanwhile, will be subject to increased monitoring after returning “unacceptable” results.
Of the 12 audits reviewed at BDO, four (33 percent) were found to have required significant improvements. At Mazars, three of eight audits reviewed (38 percent) met the same threshold.
“While it is encouraging to see some improvement in audit quality at the largest audit firms, consistent, long-term improvement is still required across the market,” said FRC Chief Executive Sir John Thompson in a press release Wednesday. “We will monitor closely the potentially negative impact on the public interest that the de-risking by firms of challenging audits may have on audit quality.”
Overall, 75 percent of the 96 audits inspected during the cycle required no more than limited improvement, compared to 71 percent in 2021 and 67 percent in 2020. Of the audits inspected, 42 took place at FTSE 350 companies.
Big Four results: KPMG earned criticism last year after nine of its 22 audits inspected (41 percent) required more than limited improvement, including one identified for significant deficiencies. Particularly singled out was KPMG’s audits of banks and similar entities, with the FRC stating its view the firm did not provide its teams with sufficient expectations and guidance.
In this year’s results, only three of KPMG’s 19 audits inspected (16 percent) required more than limited improvement. The FRC said its scrutiny of the firm’s banking audits was “intensive,” and though progress was made, KPMG will remain subject to monitoring in this area.
“The firm responded to our (2021) findings by refreshing the plan,” the FRC stated. “The planned improvements to its procedures and guidance were not all delivered in time for 2021 year-end audits. … A significant amount of further improvement work is planned for delivery during 2022, which our supervision work will focus on.”
KPMG seconded that further work remains.
“In response to the FRC’s findings from last year, specifically on banking audit quality, we have undertaken an intensive program of activity and made significant investment in our banking audit quality improvement plan,” the firm said in its report. “We are pleased to see an improvement in our banking inspection results this year, although we recognize there is more to do.”
Among the rest of the Big Four, Deloitte and PwC fared best this year, with each returning three audits requiring more than limited improvement. Deloitte had 17 audits inspected, while PwC had 18. EY had six of 17 audits inspected require more than limited improvement, though none were identified for significant deficiencies.
Last year, each of Deloitte, EY, and PwC had no audits inspected requiring significant improvement.
Second-tier firms: While all five of Grant Thornton’s audits reviewed during the cycle required no more than limited improvement, BDO and Mazars didn’t fare as well.
At BDO, problem areas included revenue, audit work on financial services entities, skepticism and challenge in key areas of judgment, and quality control and review. As a result of the deficiencies, the FRC said it will increase the number of audits it inspects next year and subject the firm to regular reporting of its progress in the interim.
BDO has recorded three straight years of audits inspected requiring significant improvement.
“We acknowledge that this is the third year that the firm’s results have fallen short of the high audit quality expected by both the firm’s leadership and the regulator,” said the firm in response. “… Our strategic plans are focused on adding quality resource to the audit stream, managing the size and shape of our audit portfolio, strengthening central infrastructure and tools, and providing high-quality development for our people through a quality transformation program to deliver on our commitment to serve the public interest by consistently delivering high-quality audits.”
At Mazars, areas of deficiency included revenue, provisions for expected credit losses, estimation and judgment, and insufficiently robust quality control procedures. The firm will also be subject to a larger inspection next year and required to report on quality improvements it has made.
“We are fully committed to addressing the issues which have been identified as part of our broader quality plan and to achieve quality results that reflect our high standards, whether measured by regulatory or internal assessments,” Mazars said.
The FRC acknowledged both firms have taken on more clients in recent years but “growth ambitions must also be tempered by a focus on quality first and foremost.”
General themes: The FRC in its overview report praised progress by all firms in their investment in technology, improvements in banking methodology, development of culture programs, and resourcing strategies. Common areas of deficiency identified across the board included estimates, impairment, and revenue, while good practices were noted in group audits and fraud risk.
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