Regulator criticises 'unacceptable' UK audit standards
The UK's accountancy watchdog has criticised large audit firms for the quality of their work after a third of their audits fell below required standards.
The Financial Reporting Council said audit standards at the big four accountants - Deloitte, Ernst & Young, PwC and KPMG - were "unacceptable". It told firms to stand up to clients even if it meant losing audit work.
Two-thirds of the 88 audits reviewed for 2019-20 required no more than limited improvements. The finding that one-third needed more than limited improvements was unacceptable, the FRC said. The review also criticised Grant Thornton and BDO.
The audit industry has come under tougher scrutiny after failing to spot financial scandals at BhS, Carillion, Patisserie Valerie and other companies. The big four accountants are preparing to split off their audit practices from more profitable consulting and tax businesses over the next few years to avoid conflicts of interest.
The FRC’s executive director of supervision, David Rule, said: “We are concerned that firms are still not consistently achieving the necessary level of audit quality. While firms have made some improvements and we have observed instances of good practice, it is clear that further progress is required. The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.”
The regulator said auditors often backed down to company management over judgements about subjects such as impairment of goodwill and intangible assets, revenue and contracts and provisions, including for bank bad debts.
"Firms’ senior management need to be clear that taking difficult decisions is an appropriate response to improving audit quality, even if it might sometimes mean delaying or modifying opinions, and ultimately losing some audit engagements," the FRC said.
The FRC was most critical of PwC, where only 65% of audits reviewed required no more than limited improvements.
"The overall inspection results [for PwC] remain unsatisfactory and we expect the firm to take specific action to address this," the FRC said. It also said KPMG's work was unsatisfactory.
After "very poor" quality audits the year before Grant Thornton's work remained unacceptable with only 55% of audits reviewed needing no more than limited improvements.