The Big Four auditing firms, BDO, Grant Thornton and Mazars averaged an audit quality of 75 percent.
According to the latest UK Financial Reporting Council (FRC) audit inspection for 2018/19, none of Britain’s leading accounting firms achieved the FRC’s audit quality target for 90 percent of FTSE 350 audits. The firms include EY, KPMG, Deloitte and PwC, and BDO, Grant Thornton and Mazars.
The report said that looking across all audit reviews completed at the largest seven firms, the outcome was 75 percent compared to 74 percent in 2017/18.
The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgemental issues.
The report said this has been a recurring finding over a number of years, and that there are many contributing factors, one of which is the mindset of audit teams, especially an absence of professional scepticism in evaluating the evidence presented by company management, tight reporting deadlines and the complexity of the judgements involved.
The report added that 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.
FRC CEO Stephen Haddrill 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.”
He continued, saying that 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 percent 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 percent 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 three,” Haddrill said.
The FRC has stated that it will take robust action for all audits falling short of the standards that it expects.