The Financial Reporting Council (FRC), the UK regulator for transparency and integrity in business has castigated international auditing of Ernst & Young, PwC, KPMG and Deloitte over declining auditing standards and called for a “swift turnaround”, if the firms are to achieve this year’s performance targets for audit quality.
FRC, which among other roles, sets codes of conduct and standards for accounting, auditing and actuarial work and 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 eight inspected firms showed that 72 per cent of audits done by the firms in 2017/18 required no more than limited improvements compared with 78 per cent in 2016/17. Among FTSE 350 company audits, 73 per cent required no more than limited improvements against 81 per cent 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.
KPMG’s performance is unacceptable
While FRC noted problems at all the Big four 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 per cent of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35 per cent in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC,” read part of the statement.
FRC further said that the overall quality of the KPMG audits inspected in the year, and 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 further said they would this year increase scrutiny of all KPMG audits which would see them inspect up to 25 per cent 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 US $1 billion in fines across the world since 2003, ran into trouble early this year following an April 2018, ban by the South African government on auditing public institutions. This was followed by a ban by Barclays amongst many other companies in South Africa.
PwC, Deloitte & EY show declining standards
Out of the 347 audits done by Ernst & Young including a total 55 companies listed on the London Stock Exchange (67 per cent) were found as; “requiring no more than limited improvements, compared with 88 per cent in 2016/17. This is against an industry standard of more than 90 per cent; 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 per cent out of 586 audits inspected compared with 93 per cent in 2016/17. Only 76 per cent of the inspected 413 audits done by Deloitte met the standard compared with 78 per cent 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 per cent of the lucrative blue-chip companies.