Auditor Grant Thornton has been put under special measures by the UK regulator and rival PwC has been criticised, after a report on the sector found a quarter of audits failed to meet quality standards.
The Financial Reporting Council said on Wednesday that only 75% of the audits it reviewed of FTSE 350 companies met acceptable standard. “Poor quality audit work remains unacceptably common,” FRC said.
Auditors are tasked with checking company accounts to make sure that investors are being given a true and accurate picture of businesses. However, the sector has faced heavy criticism in recent years after a series of corporate scandals that auditors failed to flag ahead of time, such as the collapse of BHS, Patisserie Valerie, and Carillion.
The FRC said Grant Thornton was the worst performer of the 11 firms assessed. Just 50% of its audits were judged good enough and 26% needed “significant improvement.” Grant Thornton was the auditor for Patisserie Valerie, the bakery chain that collapsed into administration at the start of the year after discovering large-scale accounting fraud.
The FRC ordered Grant Thornton to come up with “a new audit quality improvement plan” and said it would be quality checking more of its audits next year.
The regulator also singled out PwC, BHS’ former auditor, for criticism. The FRC said it was “unacceptable” that audit quality had fallen from 84% to 65% in the last year.
“At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable,” Stephen Haddrill, FRC chief executive, said in a statement.
“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.”
Issues in poor audits included failing to challenge management on judgment issues, such as how assets are valued or forecasts of future funding arrangements.
Firms have also been criticised for providing consulting services to companies they were also auditing, which was seen as a conflict of interest. PwC, EY, and KPMG have all pledged to stop providing consultancy services to FTSE 350 companies that they audit in response.
A spokesperson for Grant Thornton said: “Some of our past audits for large listed firms have fallen short of the standards we expect.
"We have proactively responded by taking significant steps to strengthen audit as a specialist practice. In June 2019, we published details of a range of major investments in our structures and our people and we are working closely with the FRC in developing and implementing that plan. We have already started to take the FRC through the detail of this plan and will continue to do so in more detail in the coming months.”
The spokesperson added that Grant Thornton would be commissioning an independent review of its business later this year.
Hemione Hudson, head of audit at PwC, said the firm was “disappointed” but was working on improvements.
“Last month we launched a wide-ranging audit quality action plan to ensure we consistently deliver high quality audits,” Hudson said.
“Our action plan targets three key areas: additional investment in training, people and technology; further alignment of our business behind audit quality; and a reinforced focus on culture and quality control.
“With £30 million additional investment per year our significant audit quality programme over the next three years not only aims to address the FRC’s inspection findings, but also to reinforce our quality-first culture.”
Earlier this year, MPs called for a break-up of the “Big Four” accountants — PwC, EY, Deloitte, and KPMG — in order to increase competition and improve quality. The “Big Four” audited 97% of FTSE 350 companies and 99% of FTSE 100 companies between 2016-17.
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.