The U.K. Financial Reporting Council (FRC) has singled out audit firms Grant Thornton and Mazars as needing to significantly improve audit quality in the wake of recent inspection findings.
The FRC on Friday released the results of its review into the quality of major local audit in the United Kingdom in the form of its first-ever report on the matter. The audits inspected were for the financial year that ended March 31, 2019. The review focused on 15 audits conducted across the seven largest audit firms in the country and covered both financial statement opinions and value for money conclusions.
Major local audits in the United Kingdom primarily relate to local government bodies, local authority pension funds, and health bodies. Ten of the 15 audits examined by the FRC’s Audit Quality Review team during this period were related to local government bodies.
Of the 15 audits, six were conducted by Grant Thornton UK, which was responsible for 109 of the 271 major local audits under the FRC’s inspection scope. EY had three audits reviewed; Mazars two; and KPMG, Deloitte, PwC, and BDO one apiece.
While all 15 audits reviewed came back relatively clean in terms of value for money arrangements, only six required limited or no improvement in financial statement opinions. The other nine each required improvements, and two of that group were identified as needing “significant” refinement.
The two most problematic audits were both conducted by Mazars, which has gone the last five years without a single major audit inspected being found to require limited or no improvement (of six inspected). “This is clearly unacceptable and follows a trend of poor inspection results,” the FRC noted.
The agency laid out the areas in which Mazars must improve, including audit of property valuations, group audit oversight, sufficiency of audit testing over income and receivables and expenditure, and Engagement Quality Control (EQC) review procedures. The FRC has requested Mazars perform a root cause analysis to get to the bottom of its review issues.
“We are disappointed with [the FRC’s] findings on our work on the audit of the financial statements at 2 of our local audit clients,” Mazars said in a response statement. “The firm will robustly respond to the findings and has plans in place to improve the quality of our local audit work.”
For Grant Thornton, five of the six audits reviewed were found to need improvement, which the FRC similarly deemed to be “unacceptable.” Problem areas included audit of property valuation, assessment and subsequent testing of fraud risks, audit procedures over the completeness and accuracy of expenditure, and EQC review procedures.
The FRC recommended a root cause analysis and that the firm update its ongoing action plan initiated in the wake of findings from previous years.
“We recognize that we need to make improvements and are investing to do so,” Grant Thornton said in response. “… We have undertaken extensive work over the past eighteen months to respond to previous comments made by the FRC and to implement our Quality Investment Plan.”
Of the Big Four firms, only EY had its results singled out in the report—with all three of its audits inspected coming back as needing little or no improvement. KPMG, Deloitte, and PwC had their results combined with BDO, as each of those firms only had one audit reviewed. Of those four audits, two came back needing improvement, with the FRC not noting which firms the two belonged to.
“All firms will need to consider the implications of this on their remaining audits and methodology,” the FRC broadly stated.