The accounting watchdog has hit out at the UK’s largest auditors, after its annual inspection uncovered an “unacceptable” number of poorly executed company audits.
The Financial Reporting Council (FRC) said a third of the 88 company audits included in its latest review fell short and required more than just “limited improvements” to meet industry standards. That is more than the 25% that fell short last year.
The watchdog said there were also signs that auditors failed to stand up and challenge their clients.
The findings will heap greater pressure on the audit industry, which has come under intense scrutiny over its failure to flag problems that led to the collapse of companies including Thomas Cook, Carillion and Patisserie Valerie.
KPMG emerged with the worst report card among the so-called big four accountancy firms with only 61% of the sampled audits meeting industry standards. PwC managed to meet standards on only 65% of its audits, compared with 76% at Deloitte and 71% at EY.
Smaller rivals such as Grant Thornton met standards on only 55% of its audits, compared with 62% at BDO and 80% at Mazars.
The FRC said it recognised the seven auditors in its review had made some improvements to their practices since 2019. However, the regulator said “the number of audits requiring more than limited improvements … remains unacceptable”.
“We are concerned that firms are still not consistently achieving the necessary level of audit quality,” said David Rule, the FRC’s executive director of supervision. “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.”
It said there had been long-running problems in the same three areas: how auditors check company reporting of goodwill and intangible assets, revenue and contracts, and loan loss provisions. Over the past three years, 46% of the subpar audits were caused by problems in those areas.
“These findings often relate to insufficient challenge of, and standing up to, management in areas of complexity and forward-looking judgment,” the FRC said.
The poor report card comes just weeks after the FRC told the big four accountancy firms – EY, PwC, KPMG and Deloitte – they would have to separate their audit divisions from the rest of their operations by 2024.