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Big Four: Time to improve UK audit quality
Accountancy News |
25/06/2012
The 2008-09 financial crisis and ongoing downturn has highlighted a number of areas for improvement in the City, not least where audit is concerned. With poor quality audit seen by many as a contributory factor to high profile collapses such as that suffered by Lehman Brothers, the spotlight remains very much on the industry. The ensuing investigation of auditor Ernst & Young should have encouraged service providers to refocus on their best practice goals, but whether or not firms are doing enough to meet their responsibilities remains a topic for debate.
Latest findings from the Financial Reporting Council (FRC) certainly do not show the audit industry in an altogether positive light. After inspecting the Big Four service providers, the regulator has raised fresh concerns over the quality of some UK auditing. Based upon a study sample, one in ten inspections carried out by PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young fell into the lowest category based upon quality. With "significant concerns" raised about ten per cent of audits completed by the major firms, it is questionable whether the industry is doing enough to repair its tarnished reputation.
Auditors can be put in a difficult position given the commercial demands on their business, but above all else they need to ensure that the books are correct and business decisions are being based on accurate financial information. They may be eager to keep clients on-side to safeguard future business, but this cannot be allowed to influence and impede the quality of audit. In order to safeguard the interests of shareholders and creditors, and protect the reputation of the industry, it is vital that any concerns are acted upon and poor practice is not overlooked.
In its inspection of PwC, the FRC found instances where the firm's auditors were not sufficiently sceptical about the information provided to them by the client. And in the check on KPMG, three of the 14 audits looked at were deemed to be of a low quality. Deloitte also found itself in hot water, with the council raising concerns about excessive cost cutting and a lack of diligence in checking facts. Lastly, Ernst & Young saw two of its 11 studied audits classified in the bottom category. Notwithstanding the fact that most of the firms' checks were of a suitable standard, the FRC report is not something the Big Four will be able to brush under the carpet.
"We need to see auditors doing work diligently and challenging management,” said Paul George, FRC’s director of auditing. "The actions firms take on scepticism have to start flowing through to day-to-day practice." He commented that efficiencies cannot be made at the expense of quality, however difficult the markets are at the current moment in time. For the sake of their own reputations and future income, the auditors are better off settling for lower profits and ensuring their job is completed to the required standard.
“As we have moved from a largely historic cost accounting framework to one which has a significant fair value component, the level of precision in the average set of financial statements has reduced," Mr George stated. The numbers may be more relevant but they "become more difficult to audit and to conclude whether they are right or wrong. Therefore there is an increased need for auditor scepticism." He claimed that the auditor reporting model has not kept pace with change in the financial reporting model, and this is an issue that needs to be addressed urgently.
However, Mr George was eager to stress that some good work has been done by the Big Four, and progress is being made towards higher standards. But in the current climate, and based upon the events of the last few years, it is inevitably the failings of the Big Four that claim the headlines, rather than their achievements. This is likely to be the case until the industry manages to restore public faith and business confidence, something that could take some time.
Posted by Jon Aspinell
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