Audit quality improves but further action required to address recurring issues
The Financial Reporting Council (FRC) today publishes its 11th annual report on its inspections of audit quality in the UK and individual reports on five of the largest firms. The FRC inspected 109 private sector audits and believe that overall the quality of auditing in the UK is improving.
Nevertheless, there is room for further improvements in the quality of auditing and at the FRC’s request a number of initiatives are being undertaken by firms to address recurring issues including undertaking root cause analysis; developing action plans to address weaknesses; and, in some instances, performing additional work to remedy significant deficiencies.
Entities outside the FTSE 350 are most likely to show a need for significant improvement in their audits. The FRC recognises that smaller companies have less resource to put into the preparation of their financial statements and this can make the audit more difficult. However, investors consistently say they rely particularly heavily on the quality of reporting in smaller listed companies given the absence of other analysis. Therefore it is particularly important that a good audit is done. The FRC is working to help companies improve the quality of reporting in this sector and will publish a report shortly. We look to the audit firms to play their part fully in this area too.
In 2015/16 the FRC will include a focus on the audits of businesses where complex supplier arrangements are prevalent: predominantly food, drinks and consumer goods manufacturers and retailers. We will pay particular attention to the extent to which the audit team has challenged and checked the appropriateness of how these arrangements are accounted for.² The FRC also plans to inspect a number of first year audits to assess the extent to which changes in auditors have an impact on audit quality.
Executive Director, Conduct, Paul George said:
“Audit is an integral part of the reporting process that ensures investors have confidence in the information they receive on the performance of the companies they invest in.
We were pleased that firms responded positively to the new extended auditor reporting requirements. We hope to see further improvements in the clarity of reporting by auditors of how they have addressed the assessed risks. We also expect auditors to discuss findings from our inspections to Audit Committees (“ACs”) and will monitor closely how companies report our findings to their shareholders.”
The FRC’s Audit Quality Practice Aid for Audit Committees, also published today, seeks to assist Audit Committees by providing an overview of how to assess audit quality and highlights factors and questions that Audit Committees could consider in doing so.
Audit Quality Inspections Annual Report 2014/15 (PDF)
Audit Quality Inspection Report 2014/15: Deloitte LLP (PDF)
Audit Quality Inspection Report 2014/15: Ernst & Young LLP (PDF)
Audit Quality Inspection Report 2014/15: KPMG LLP and KPMG Audit Plc (PDF)
Audit Quality Inspection Report 2014/15: PricewaterhouseCoopers LLP (PDF)
Audit Quality Inspection Report 2014/15: BDO LLP (PDF)
Audit Quality Practice Aid for audit committees (PDF)
Notes to editors:
- The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
- The FRC’s Corporate Reporting Review team will also give priority to the reporting of these arrangements.
- Next year the FRC plans to inspect around 140 audits. This is a step up in activity owing to the FRC’s implementation of the CMA’s recommendation that all FTSE 350 audits should be inspected every five years.