The Financial Reporting Council’s (FRC) latest audit inspections report has revealed that the largest seven largest UK audit firms have failed to meet the FRC’s quality target, relating principally to audits of companies’ December 2017 year-ends.
The report found that only 75% of FTSE 350 audits reviewed were good or required no more than limited improvements, compared with 73% in 2017/18, and no firms achieved the FRC’s audit quality target of 90%. Looking across all audit reviews completed at the largest seven firms, the outcome was 75% compared with 74% in 2017/18.
Accounting firm and advisory Grant Thornton has now been placed under increased scrutiny due to “sustained poor results, with only 50% of reviews at firm deemed to be of a good standard or required limited improvements in 2017, compared with 75% last year. In total, 26% of the firm’s audits reviewed in the past five years have required “significant” improvement.
The regulator also said while results at KPMG have improved, the firm remains subject to increased scrutiny until the firm has demonstrated a “sustained improvement” in audit quality.
Additionally, the deterioration from 84% to 65% in the results for PwC’s FTSE 350 audits inspected was also deemed “unsatisfactory” and the FRC has required the firm to take “prompt and targeted” action to address this decline.
The FRC added each firm has committed to specific actions to enhance audit quality, and for the “worst performers”, detailed audit quality improvement plans. The regulator said it will assess the success of these initiatives and secure further action if necessary.
Stephen Haddrill, FRC CEO, said: “At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable. 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. The latest review also reinforces the importance of work being undertaken by the FRC and others to bring about quality improvements across the sector.”
He added: “For 2019/20, we are extending our 90% quality target for FTSE 350 audits to all audits inspected. We will set a new target for audit firms, for 2020/21 onwards, that 100% of audits inspected should require no more than limited improvement. In other words, starting from June 2019 financial statement year ends, we expect no audit to be assessed as either a 2B or a 3.”