The Financial Reporting Council (FRC) has criticised the performance of the UK’s biggest audit firms as ‘unacceptable’. Its annual audit inspection results found that a third of them needed more than limited improvements.
Each year the FRC reports its inspection findings on the audit quality of the UK’s top seven firms. It reviewed 88 audits across the companies and found:
- 59 (67%) of the 88 audits reviewed required no more than limited improvements.
- 29 (33%) of the audits required more than limited improvements, something the FRC regards as ‘unacceptable’.
Although the FRC accepted that firms have made some improvements and introduced good practice, it reported that firms are still not consistently achieving the necessary level of audit quality and need to make further progress.
In particular, the FRC repeated its calls from years for improvements in three audit areas.
- Impairment of goodwill and intangibles.
- Revenue and contracts.
- Provisions, including loan loss provisions.
It said that senior management needed to be clear that taking difficult decisions is an appropriate response to improving audit quality, even if it might sometimes mean delaying or modifying opinions and ultimately losing some audit engagements.
Changes
In order to encourage companies to improve future audits, the FRC announced new changes to its scrutiny. It planned to:
- Increase its proactive supervision of the large audit firms.
- Identify particular weaknesses within specific firms.
- Request plans for improvement, a timetable and hold the firms responsible for delivery.
- Increase the FRC's transparency and publish key findings of each of its individual audit inspections.
- The Big Four firms to begin implementing operational separation of audit practices from the rest of the firm.
- Strengthen its own Audit Quality Review teams.
The FRC last week published its guidelines for the separation of audit and accounting operations of the Big Four firms.
Links
Audit: October deadline for Big Four's plans for separation
The Financial Reporting Council (FRC) has published ‘Objectives, outcomes and regulation’, outlining its plans to separate the UK’s Big Four accounting firms' audit operations by 2024.
Audit thresholds
What are the audit thresholds? Which entities are exempt form audit?
AML: Identification and Verification, Entities
A subscriber guide to Anti-Money Laundering (AML) identification for entities.
External links
FRC: Overview of Audit Quality Review
FRC: Audit Firm Specific Reports
Individual reports on our audit quality inspections of each major audit firm.
