The Big Four audit practices must act swiftly to reverse the decline in this year’s audit inspection results if they are to achieve the targets for audit quality set by the FRC.
Overall results from the most recent inspections of eight firms by the FRC show that in 2017/18 72% of audits 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.
Across the Big 4, the fall in quality is due to a number of factors, including a failure to challenge management and show appropriate scepticism across their audits, poorer results for audits of banks. 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.
Stephen Haddrill, CEO, FRC, said,
“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 scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances. Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders.”
The increased FRC scrutiny of KPMG includes inspecting 25% more KPMG audits over its 2018/19 cycle of work; and monitoring closely the implementation of the firm’s Audit Quality Plan. KPMG agrees that its efforts in recent years have not been sufficient; the FRC will hold KPMG’s new leadership to account for the success of their work to improve audit quality.
Full press release
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