Seven of the global biggest audit firms, working in the United Kingdom, including the so-called Big Four – EY, KPMG, Deloitte and PwC yet again, failed to meet the audit quality targets set by the Financial Reporting Council (DRC); UK’s audit watchdog.
The latest audit inspections report for 2018/19, which relates principally to audits of companies’ for results ending December 2017 found that only 75% of FTSE 350 audits reviewed were good or required no more than limited improvements. Although there was an improvement from 73% in the 2017/18 report, none of the seven firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits.
The firms are: Deloitte, KPMG, Ernst & Young, PWC, BDO, Grant Thornton, Mazars. All, except Mazars are represented in Uganda.
The FTSE 350 are UK’s top 350 listed companies.
The FRC said it had found cases in all seven firms where auditors had failed to challenge management sufficiently on judgemental issues and that “this has been a recurring finding over a number of years.”
The FRC, amongst many other reasons blamed this on “familiarity” that arises “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.”
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.”
He said that the FRC would institute stringent targets moving forward.
“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,” he said.
35% of PWC’s audits fail quality test
The FRC reported that 77% of PWC’s audits met the standard (requiring no more than limited improvement), compared with 82% in 2017/18 while only 65% of the FTSE 350 audits met the standard compared with 84% in 2017/18.
“We consider the notable decline in inspection results, particularly for FTSE 350 audits, by comparison to prior years to be unsatisfactory and have required the firm to take prompt and targeted action to address this decline,” said the FRC of PWC’s audits.
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.
Although KPMG had improved in their performance- 76% of the firm’s audits met the standard, compared to 61% in 2017/18 and 80% of the FTSE 350 audits were compliant, compared with 50% in 2017/18, KPMG still fell below the required standard.
BDO was the best overall, with a review of the firm’s audits showing that seven out of eight audits reviewed were assessed as requiring no more than limited improvements, the same as in 2017/18.
While back in Uganda, there is no equivalent of the FRC, a number of audit firms have been in the news, notably KPMG and PWC for their involvement in the murky closure of Crane Bank and subsequent sale to dfcu Bank.
In 2017 Bank of Uganda did not license Ernst & Young (EY) to audit financial institutions regulated by it- over unclear reasons.