The Financial Reporting Council’s (FRC) latest audit inspection has found that there has been no improvement on last year, singling out Grant Thornton following sustained poor results.
The inspections found that 25% of assessed audits of FTSE 350 companies were below an acceptable standard, meaning 75% were deemed good or requiring limited improvements. The FRC’s target is 90%, which was not met by any firms assessed.
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.”
The latest audit inspections, which relate principally to audits of companies’ December 2017 year-ends, found cases in all seven firms where auditors had failed to challenge management sufficiently on judgemental issues.
The FRC said that this has been the case for several years, and stems from the mindset of auditing teams, tight reporting deadlines and the complexity of judgements involved.
It also cited familiarity arising from long-standing audit relationships as a key issue, which is particularly problematic if the company comes to be considered a client for the auditor, rather than the shareholder or investor.
Grant Thornton
The report brings Grant Thornton under increased scrutiny after the assessment found that just 50% of its audits were classed as good or required limited improvement. Over the past five years 26% of the firm’s reviewed audits have required significant improvement.
As a result, the FRC has announced that it will increase its scrutiny of Grant Thornton, which includes requiring a new audit quality improvement plan and increasing the number of audits to inspected in 2019/20.
In response to the report, a spokesperson for Grant Thornton said: “This FRC Report makes clear that the entire profession must improve the quality of its work and Grant Thornton is no exception.
“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.
Link: Grant Thornton Improvement Plan
“Furthermore, we are commissioning an independent review later this year which will help identify further important areas for improvement.
“Audit plays a critical role in the way business and society interact, but it depends on the trust and confidence of all those who rely on it. As a profession we must commit to regaining that trust.”
PwC & KPMG
Other firms were also referenced. PwC saw the number of good audits of FTSE 350 companies fall from 84% to 65% and the FRC urged the firm to take ‘prompt and targeted action’.
PwC’s action plan to strengthen its focus on audit quality, which was announced in June 2019, was acknowledged.
KPMG will remain subject to increased scrutiny from the FRC, but results have improved. The firm will remain under increased scrutiny until the FRC feel KPMG has demonstrated a sustained improvement in audit quality.
New targets
The FRC has set new targets for audit firms to meet, which Mr Haddrill detailed: “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.”