In a normal world, the Financial Reporting Council’s (FRC)Annual review of audit qualityshould have resulted in a series of news articles expressing concern that one in four audits delivered by both PwC and EY required more than limited improvements.
Those with a sunny disposition might alternatively have focused on the continued (relative) excellence of Deloitte, who have led this table for years and remain at a satisfaction rate of around 95%, while KPMG has generally made big strides in recent years and now isn’t too far behind.
Unfortunately, when it comes to what are referred to as Tier 1 firms, there was a much bigger shock in store. In the latest list, this category has lost Grant Thornton but still supplements The Big Four with BDO and Forvis Mazars and both of these smaller firms hit new lows in the latest report, although the sample sizes are quite small, which can give rise to fluctuation from year to year.
The classifications used are as follows.
Good: We identified no areas for improvement of sufficient significance to include in our report.
Limited improvements required: We identified one or more areas for improvement of limited significance.
Improvements required: We identified one or more key findings requiring more substantive improvements.
Significant improvements required: We identified significant concerns in one or more areas regarding the sufficiency or quality of audit evidence, the appropriateness of key audit judgments or another substantive matter such as auditor independence.
Drawing a line
The FRC only draws a line between the first two categories and the others and it doesn’t seem to publish separate figures delineating between “good” and “limited improvements required”. Many might reasonably argue that the measure of a good audit is to come under the category of “Good”, not regarding as acceptable those that require improvements, even if those are somewhat limited.
Only 38% of BDO’s audits even achieved the good or limited improvements level, while Forvis Mazars were barely better at 44%, both the lowest levels in the past five years. The Forvis Mazars figure is particularly disappointing given that it achieved an 80% score as recently as 2019/20.
In the past, the FRC has often appeared lily-livered when it comes to criticising Tier 1 firms. It is apparently losing patience stating: “Both BDO and Forvis Mazars must urgently re-assess their recurring findings to understand why previous quality actions have not had the impact on audit quality expected. They must also rigorously assess all other areas where key findings have been identified this year.”
It also said: “We will continue to apply more intensive supervision to BDO and Forvis Mazars.”
While it is bad enough to have the majority of your audits require improvement, the situation is worse given that over 10% of the Forvis Mazars audits required significant improvements, while the figure for BDO was even higher at 15%.
Would it be unreasonable to conclude that the audit reports in these cases are not worth the paper on which they are written and, if you are a stakeholder, perhaps you should be asking for your money back?
Drastic action
Although FRC has concluded that BDO needs to “urgently improve the firm’s audit quality-control procedures” and also improve the quality of auditing in a number of specified areas, one wonders if it will ever take more drastic action naming and shaming individuals or, conceivably, suspending the right to audit.
Those interested in drilling down further will discover key findings followed by statements as to why these are important.
This year the key findings cover:
- errors in primary financial statements (three audits)
- weaknesses in audit of revenue (two audits)
- reliance on work done by other network firms
- lack of challenge to management in relation to going concern
- flaws in substantive analytical procedures
- weaknesses in audit of inventory
- lack of consideration of the potential capitalisation of development costs.
The fact that almost every one of the Tier 1 firms has been auditing for a century or more and the FRC still feels it necessary to lay down the absolute basics should be deeply worrying.
Those in glass houses…
If anyone at smaller firms is chuckling and wishes to point the finger, based on a smaller sample size, Tier 2 and 3 practices appear to be even worse. In this category, only 38% required no more than limited improvements, while exactly the same number needed significant improvements. The significant improvements category is at its highest level for five years, suggesting that auditors do not learn from past mistakes.
Not too long ago, as part of proposals to streamline and improve the audit industry, it was suggested that audits of major FTSE companies should no longer be the exclusive preserve of the Big Four and, instead, they should jointly audit with smaller practices. Given the damning statistics revealed this year, perhaps that idea needs a rethink?
Will things ever change? Judging by the latest figures, it seems that too many auditors continue to be happy to cut costs and quality, even at the risk of damaging their own reputations and those of the profession.
