The Financial Reporting Council (FRC), the UK regulator for transparency and integrity in business has said it is “disappointed” with the ‘Big 4’ auditing firms over declining auditing standards and called for a “swift reversal”, if they are to achieve this year’s performance targets for audit quality.
The FRC, which among other functions, sets codes of conduct and standards for accounting, auditing and actuarial work, conducts annual reviews of audits of Britain’s biggest companies to ensure they meet certain standards.
“At a time when public trust in business and in audit is in the spotlight, the Big 4 must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and skepticism by auditors, in particular in their bank audits,” said Stephen Haddrill, CEO, FRC in a statement released June 2018.
Overall results of 8 inspected firms showed that 72% of audits done by the firms in 2017/18 required no more than limited improvements compared with 78% in 2016/17. Among FTSE 350 company audits, 73% required no more than limited improvements against 81% in the prior year,
“Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders,” added Haddrill.
In what is now becoming a growing assault on the holier-than-thou reputation of the ‘Big 4’ that were previously the personification of accounting integrity, FRC faulted the 4 firms for “failure to challenge management and show appropriate skepticism across their audits and poorer results for audits of banks.”
KPMG’s performance is unacceptable
While FRC noted problems at all the Big 4 firms, it singled out KPMG for the consistent poor quality of its work.
“There has been an unacceptable deterioration in quality at one firm, KPMG. 50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC,” said the statement.
FRC further noted that overall quality of the KPMG audits inspected in the year, and “indeed the decline in quality over the past five years, is unacceptable and reflects badly on the action taken by the previous leadership, not just on the performance of front line teams.”
FRC said, they would this year increase scrutiny of all KPMG audits which would see them inspect up to “25% more KPMG audits over its 2018/19 cycle of work; and monitoring closely the implementation of the firm’s Audit Quality Plan.”
KPMG which has had to pay over $1 billion in fines across the world since 2003, run into trouble early this year following an April 2018, ban by the South African government on KPMG from auditing public institutions. This was followed by a ban by Barclays amongst many other companies in South Africa.
Declining performance at PwC, Deloitte & EY
Out of the 347 audits done by Ernst & Young including a total 55 companies listed on the London Stock Exchange, 67% were found as “requiring no more than limited improvements, compared with 88% in 2016/17. This is against an industry standard of more than 90%, something that the FRC said was a “disappointing outcome in comparison to the progress made in the previous two years.”
PwC also fell short of the standard, declining to 82% out of 586 audits inspected compared with 93% in 2016/17. Only 76% of the inspected 413 audits done by Deloitte met the standard compared with 78% in 2016/17.
Four other firms, inspected by FRC; BDO, GT, Mazars and Moore Stephens all showed “general improvements in the quality of inspected audits.”
Of the 8 inspected firms, only 5: KPMG, PwC, Deloitte, Ernst & Young and BDO have offices in Uganda and are believed to control more than 80% of the lucrative blue-chip companies.