Audit Quality Review: “Long-term improvement” still required, FRC says

Improvement is still required despite good results in the Financial Reporting Council’s latest audit quality review, as performance at Mazars and BDO remain “unacceptable”.

The FRC revealed in its latest audit quality review of the largest audit firms, that 75% of audits inspected were good or required “limited improvement”. However, a quarter of the overall audits inspected were below par.

“While it is encouraging to see some improvement in audit quality at the largest audit firms, consistent, long-term improvement is still required across the market,” said FRC chief executive, Sir Jon Thompson.

Room for improvement

The latest audit quality review results are an improvement on previous years. In 2021, 71% of audits inspected were deemed to be good, with that same statistic sitting at 67% in 2020.

The watchdog says the improvements are down to its “increasingly assertive supervision approach”, as well as investment from the firms in their systems, people, and capabilities to improve audit quality.

Five of the largest firms had no audits requiring significant improvements and KPMG’s individual audit inspections have “significantly improved”, according to the FRC. .

The regulator will continue to monitor KPMG banking audits, however, after it was found to be particularly problematic last year. The firm was labelled the worst for audit quality of the seven reviewed in 2021, with its performance being labelled “unacceptable” by the FRC.

This year’s review by the regulator noted that four of the eight audits reviewed at Mazars, and five of the 12 audits reviewed at BDO required more than limited improvements.

In response, BDO said it is “disappointed” its grades this year do not meet the standards expected by the regulator.

“We have made significant investments in resourcing our audit practice over the last year, including the addition of 350 people to take our overall UK audit team headcount to 2,800.

“Further investments in audit quality initiatives include recent enhancements to our methodologies and technology. However, these actions take time to embed, and are therefore not reflected in this year’s reviews,” Scott Knight, head of audit at BDO, said.

Mazars were unavailable for comment at the time of publication.

Restoring audit quality

Looking ahead, the FRC aims to build on its “assertive advisory approach” to deliver consistently high quality audit that will “drive increased choice and resilience in the market”, according to Thompson.

Iain Wright, managing director, reputation and influence, at the Institute of Chartered Accountants in England and Wales (ICAEW), is pleased that the investment made by audit firms in people, processes and technology, are paying off.

“It’s particularly notable that no FTSE 100 company audit needed significant improvement and FTSE 250 audits only required minor improvements, and this sends out a strong positive message to global investors wanting to invest in the UK capital markets,” Wright said.

“The UK economy needs a high quality and resilient audit market to prosper and ensure trust in business. It’s important that firms are not discouraged from retaining or taking on high-risk audits, and that those wanting to grow their market share focus are supported.

“We hope the regulator will continue to work with the profession to support the improvements needed to drive up quality, choice, and resilience in the market,” he added.

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