“Poor quality audit work remains unacceptably common,” said the U.K. Financial Reporting Council in releasing the results of its 2018 inspections on 2017 financial statements.
The FRC says it assessed 75 percent of the audits of the U.K.’s largest companies as good or requiring limited improvement, meaning 25 percent fell below an acceptable standard. The FRC had set a target for each firm to achieve a 90 percent success rate on its audits. Across the seven largest firms inspected by the FRC, including the Big Four, the 75 percent success rate represents only a 1 percentage point improvement over the prior year results.
“The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgmental issues,” the report says, suggesting potential problems with application of skepticism, tight reporting deadlines, and familiarity in long-standing audit-client relationships. “The audit firms need to work harder to solve this problem.”
In terms of individual firm results, the FRC called out Grant Thornton for a significant decline in audits assessed as good or requiring limited improvements, which fell from 75 percent to 50 percent in the most recent reviews. The audit regulator said it plans to increase its oversight at the firm, requiring a new audit quality improvement plan and increasing the number of audits to be inspected in the 2019-20 cycle.
PwC also delivered a lower percentage of audits meeting FRC’s requirements, falling to 65 percent from 84 percent for the largest audits. “The FRC has required the firm to take prompt and targeted action to address this decline,” the regulator said. PwC said it had a plan to strengthen its focus on quality with additional investments in people, training, and technology, as well as structural changes to the business.
KPMG improved on its targeted pass rate with the FRC, from 61 percent in 2017-18 to 76 percent in the latest reviews. Among its largest audits, the pass rate rose from 50 percent to 80 percent. “While results at KPMG have improved, the firm remains subject to increased FRC scrutiny,” the regulator said. “This will continue until KPMG has demonstrated a sustained improvement in audit quality.”
EY also delivered an improvement in its pass rate with the FRC, rising from 67 percent in 2017-18 to 78 percent in the latest cycle of inspections. Among the largest audits, the pass rate rose from 82 percent to 89 percent. Deloitte also improved its overall pass rate from 76 percent to 84 percent, although it lost some ground with its largest audits, falling from 79 percent to 75 percent.