Monday 21 October 2019

Audit giants all fail to meet British regulator's quality test for second year

Scrutiny: Grant Thornton had audited troubled chain Patisserie Valerie. Photo: Reuters
Scrutiny: Grant Thornton had audited troubled chain Patisserie Valerie. Photo: Reuters

Huw Jones

All of the UK's leading accounting firms have failed to hit quality targets set by their regulator for auditing company books for the second year in a row, with Grant Thornton and PwC singled out to join KPMG under tougher supervision.

The review from the Financial Reporting Council (FRC) will pile pressure on the UK government to implement a proposed sector shake-up, prompted by corporate failures at builder Carillion, retailer BHS, and an accounting scandal at cafe chain Patisserie Valerie.

The FRC said EY, KPMG, Deloitte and PwC, known as the Big Four, and BDO, Grant Thornton and Mazars from the next tier down, all failed to hit a target that 90pc of audits reviewed by the regulator were good or required only limited improvements. Only 75pc of the sample of audits from among Britain's 350 top listed companies for the year ending December 2017 met the 90pc target overall, as accountants failed to challenge information clients gave to them, the FRC said.

"At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable," said Stephen Haddrill, the FRC's chief executive.

Radical reform of the sector was proposed last December to rebuild public trust in audit, including replacing the FRC, described by lawmakers as toothless, with a more powerful watchdog. Mr Haddrill and his chair Win Bischoff are being replaced. The bulk of the top 350 listed firms would have two auditors in a bid to improve audit quality, but this depends on Grant Thornton, BDO and Mazars winning the confidence of blue-chip companies.

The timing of reform is unclear given it needs legislation to implement and parliament is focused on Britain's protracted departure from the European Union. The ICAEW, a professional accounting body, said audit faces a "watershed moment" and the government should implement reform without delay.

The new watchdog should apply "fresh thinking" to improve audit quality and not be constrained by targets and methods bequeathed to it by the FRC, the ICAEW said.

British business minister Greg Clark told a parliamentary committee last month there would be a public consultation on a "proportionate package of reforms" to improve audit quality and maintain Britain's global status as a centre of audit expertise.

The FRC said it found cases in all seven firms where auditors failed to challenge management sufficiently, a "recurring finding" for several years.

The watchdog said it would raise its target to 100pc from 90pc for reviews of audits starting from June 2019 financial statement year-ends, as having any below-standard audits was unacceptable.

Only half of Grant Thornton's sample audits were assessed as good, down from 75pc in 2018, the FRC said. More than a quarter of its audits reviewed in the past five years needed significant improvement.

Both Grant Thornton, which audited Patisserie Valerie, and PwC, auditor of BHS, had already announced steps to bolster audit activities in anticipation of the FRC findings.

The deterioration from 84pc to 65pc in PwC's results was also "unsatisfactory" and the FRC will "scrutinise closely" how the firm implements its improvement plan.

The FRC said 84pc of Deloitte's audits met the required standard, up from last year, with EY at 78pc, also up.

But 40pc of Mazars' reviewed audits failed to meet the target, worse than in 2018, while 12.5pc of BDO's sample audits were below the acceptable standard, unchanged from last year.


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