The Financial Reporting Council has called on accountancy firms to flag poor quality audits sooner.
Tools for spotting signs of poor quality audits should be used more effectively, a review of their uses have found. The FRC has found that most accounting firms are failing to assess whether their audits are any good until after they have published them.
Who are the Financial Reporting Council?
The Financial Reporting Council, or FRC, is an independent regulator in the UK and Ireland.
They are responsible for regulating auditors, accountant sand actuaries. They set the UK’s Corporate Governance and Stewardship Codes and set UK standards for auditing, accounting and actuarial work.
Their aim is to “promote transparency and integrity in business”, and routinely ensure that firms are working to the highest standard.
What did the FRC say?
After a review, the FRC have said that Audit Quality Indicators (AQIs) are not being used effectively. They are being used after the audit has taken place, rather than during.
The FRC have called for better use of these AQI’s including how much time is spent reviewing judgements, how much of the work is done by senior staff and how heavy each partners workload is.
It has called on firms to broaden the range of AQIs they evaluate, as well as report on them monthly. This is to ensure that they are identifying early interventions in audits if there is an issue.
Last year, all of the UK’s leading accountancy firms failed to hit audit quality targets for the second year in a row. Grant Thornton and PwC have been singled out to join KPMG under tougher supervision.
This warning to use these tools more effectively comes after the FRC announced they were investigating firm EY.
Why are EY being investigated?
Last week, the FRC announced they would be launching an investigation into the Big Four accountancy firm, EY’s audit of NMC Health.
The watchdog said that it was investigating the audit for the year ended 2018. NMC Health collapsed into administration last month after an investigation uncovered $2.7bn more debt than the board was aware of. In February, the FCA launched an investigation into NMC after shares were suspending from trading following the accounting scandal.
However, this is not the only ongoing investigation into EY’s practices. They are also being investigated over their audit of Thomas Cook. EY reportedly warned that there was “significant doubt” whether Thomas Cook could continue as a going concern in those accounts.
Who else have the FRC investigated?
EY are not the only accountancy firm that has been investigated as of late. An increasing number of large firms being embroiled in accountancy scandals.
KPMG are currently being investigated for their role in the collapse of Carillion, the verdict of which is likely to be delayed. Grant Thornton faced fines late last year after the FRC found audit failures.
PwC were also fined a few years for their failures in the audit of British Home Stores. The firm were fined a record amount of £10m. Interestingly, PwC also held the previous record of £5.1m for their audit of RSM Tenon back in 2011.
What have accountancy firms said?
In response to the FRC’s review, Deloitte told City AM; “We support the effective use of audit quality indicators and will consider the findings of today’s FRC report to continue improving how we measure it”.
In a statement, EY said “We welcome the FRC’s thematic review and will be carefully considering the findings as part of our continuous focus on audit quality”.