In the latest annual report of the UK’s Financial Reporting Council (FRC), CEO Stephen Haddrill notes an “unacceptable deterioration” in the audit quality of KPMG. Grant Thornton also comes in for a tongue lashing for its lack of improvement in audit quality.
The FRC sets audit and ethical standards for audit firms by monitoring audit quality, taking enforcement action and delegating various oversight tasks to the Recognised Supervisory Bodies (RSBs).
“In April 2018 we announced innovative plans to enhance our monitoring of the six largest audit firms, the Audit Firm Monitoring and Supervision approach (AFMAS). This complements our continuing work in reviewing audit quality by seeking evidence about leadership and governance, firm values and behaviour, business models and financial soundness, and risk management. AFMAS aims to reduce the likelihood of systemic deficiencies that could impact on audit quality and ultimately the stability of the financial markets. We do not have specific powers in this area, but it contributes to our work on audit quality,” says Haddrill.
In 2015 the FRC set the auditors of FTSE 350 companies a target that, by 2018/19, at least 90% of those audits inspected should require no more than limited improvements. After a number of years of increasing audit quality, in 2017/18 some 73% of audits achieved this standard, leaving a significant amount of progress required in the final year to meet the target.
“One firm in particular, KPMG, had shown an unacceptable deterioration in quality, and this year we have carried out additional reviews of its audits,” adds Haddrill.
The 90% target has not been met this year, audit quality is not as high as it should be, and in some quarters confidence in audit has fallen. “Our assessment of the reviews we carried out this year is that 75% (2017/18: 73%) achieved the standard. This shows only a very limited improvement on last year, and performance at individual firm level was mixed.
The following actions will be taken in the next financial year to lift audit standards:
- The FRC will continue to measure firms audit quality against the 90% FTSE 350 target and expect all firms to meet that target.
- It will also extend the 90% target to all other audits within the scope of its inspection.
“We will, for 2020/21 onwards, set a new target for audit firms, that 100% of audits should require no more than limited improvement. At one firm, Grant Thornton, the quality of the audits inspected in the year, and indeed the overall lack of improvement in quality over the past five years, is a matter of deep concern. We have therefore required the firm to prepare and implement a detailed action plan to improve quality.
“We are taking forward recommendations relating to greater transparency over our inspections, to respond to the Statutory Audit Services Market Study from the CMA.”