The last few years have been tricky for auditors, with a number of high-profile corporate failures which were not flagged up in advance by the auditors. As well as the resulting severe criticism of auditors, further ethical and audit failings have since occurred, thus worsening the situation.
The Financial Reporting Council (FRC), as the authority responsible for setting standards and monitoring quality, also came under scrutiny. The Kingman Review suggested wide-ranging changes to their way of operating and their powers. However, with Brexit and elections taking government time we have, as yet, seen no legislative changes.
It is against this backdrop that the FRC Developments in Audit report published in November 2019, sets out the findings from their Audit Quality Review (AQR) work on, primarily, Public Interest Entities (PIEs). It also sets out the steps the FRC has taken to strengthen standards (see page 55 of the report), even without the legislative backing that might allow more extensive interventions.
Sadly, the report paints a somewhat sorry tale. Audit quality is still not meeting the standards expected (the target is that 90% of FTSE 350 audits are classified as good or requiring only limited improvements, but only 75% reached this level). The findings show that auditors are still struggling to:
- Challenge management sufficiently, especially for:
- Long-term contracts
- Fair value amounts
- Perform routine procedures correctly, especially when auditing
- Consistently test and rely upon controls, where appropriate
- Consistently audit the "front half" of the annual report.
This period's reviews resulted in Grant Thornton being put into "special measures" with a plan required for improvement, which the FRC will monitor. PwC also had significant problems and has already implemented an action plan. KPMG, who were previously put into such measures, appear to be making progress with 80% of their audits meeting the target this year. EY almost reached the target at 89% but Deloitte were only at 75% with particular issues on group audits.
Of course, the FRC issues fines as well as requiring firms to implement improvement plans. In the year 2018/19 there was a trebling of these, with a total of £42.9m levied. All of this is designed to drive quality and to show that the FRC has teeth.
The lessons for auditors, whether of PIEs or not, is to look carefully at what improvements may be needed to your quality and implement them swiftly.
First published in London Accountant December 2019