Latest FRC Audit Inspections
10 July 2019
- 75% of FTSE 350 audits assessed as good or requiring limited improvements. The FRC’s target is 90%. Overall there has been no improvement on last year
- 25% of assessed audits are below an acceptable standard
- Grant Thornton placed under increased scrutiny due to sustained poor results
Audit is vital to investor confidence in UK companies. Poor quality audit work remains unacceptably common.
The latest audit inspections for 2018/19, which relate principally to audits of companies’ December 2017 year-ends, found 75% of FTSE 350 audits reviewed were good or required no more than limited improvements, compared to 73% in 2017/18. No firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits to meet this standard. Looking across all audit reviews completed at the largest seven firms, the outcome was 75% compared to 74% in 2017/18. In the reports published today, each firm has committed to specific actions to enhance audit quality including, for the worst performers, detailed audit quality improvement plans. The FRC will assess the success of these initiatives and secure further action if necessary.
The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgemental issues. This has been a recurring finding over a number of years and it can have many contributory factors. These include the mindset of audit teams, especially an absence of professional scepticism in evaluating evidence presented by company management, tight reporting deadlines and the complexity of the judgements involved. Familiarity is also a factor arising from long-standing audit relationships, particularly if the company comes to be considered as “the client” for the auditor, rather than the shareholder or investor. The audit firms need to work harder to solve this problem. The FRC is undertaking detailed work to assess how the audit firms are responding to this.
Stephen Haddrill, FRC CEO, said:
“At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable. Audit firms must identify the causes of their audit shortcomings and take rapid and appropriate action to improve quality. Our latest results suggest that they have failed to achieve this in recent years.”
“The latest review also reinforces the importance of work being undertaken by the FRC and others to bring about quality improvements across the sector.”
“For 2019/20, we are extending our 90% quality target for FTSE 350 audits to all audits inspected. We will set a new target for audit firms, for 2020/21 onwards, that 100% of audits inspected should require no more than limited improvement. In other words, starting from June 2019 financial statement year ends, we expect no audit to be assessed as either a 2B or a 3.”
While there has been only a minor change in the inspection results as a whole, there have been shifts in individual firms’ results.
At Grant Thornton, the FRC assessed that 50% of reviews were good or required limited improvements, compared to 75% last year. In total, 26% of Grant Thornton’s audits reviewed in the past five years have required significant improvement. The FRC has therefore increased its scrutiny of Grant Thornton, including: requiring a new audit quality improvement plan and increasing the number of audits to be inspected in 2019/20.
The deterioration from 84% to 65% in the results for PwC’s FTSE 350 audits inspected is unsatisfactory and the FRC has required the firm to take prompt and targeted action to address this decline. In June 2019, PwC announced an action plan to strengthen its focus on audit quality. The plan includes additional investment in people, training and technology, structural changes to PwC’s business, and a reinforced focus on culture and quality control. The FRC will scrutinise closely the implementation of this plan.
While results at KPMG have improved, the firm remains subject to increased FRC scrutiny. This will continue until KPMG has demonstrated a sustained improvement in audit quality. The FRC scrutiny will cover the impact of KPMG’s recently announced changes to governance of their audit practice, as well as on key aspects of the firm’s Audit Improvement Plan, including the firm’s central review process and new audit guidance.
The FRC takes robust action for all audits falling short of the standards that it expects. All audits that it has assessed as requiring improvements or significant improvements are considered for Enforcement action.Over the past two inspection cycles, across all firms inspected, 16 audits have been referred for possible Enforcement action. Investigations have so far been opened in eight cases.
A link to the firms’ public inspection results can be found here
The names of audits reviewed by the AQR review are listed here
A summary of the FRC’s Audit Quality Review is explained here