Regulator annual healthcheck concludes bigger audits are getting better but smaller ones are getting worse

Oliver Gill
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KPMG currently boasts the largest number of listed company audits (Source: Getty)

The audit quality of Britain’s smaller firms are getting worse while statutory sign-offs of larger companies are getting better, the Financial Reporting Council (FRC) said today.

In its annual healthcheck of Britain’s beancounters, the FRC said 72 per cent of non-FTSE 350 audits required “no more than limited improvements”. This compared with 77 per cent meeting the criteria, seen as regulator’s passmark, in the prior year.

However, 81 per cent of FTSE 350 audits met the benchmark, up from 77 per cent.

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Around 95 per cent of the FTSE 350 are audited by the Big Four accountants, Deloitte, PwC, KPMG and EY. Smaller accountancy firms have a larger share of the audit market outside of the large and mid-cap indices.

But the FRC director of audit quality Mike Suffield told City A.M. care needed to be taken before drawing the conclusion today’s trend was a consequence of a greater proportion of non-Big Four auditors signing off smaller company accounts.

Suffield highlighted accountancy firms of all sizes told the FRC non-FTSE 350 audits could be “more challenging”.

“There is a potential emerging concern here but we want to see how that draws out of a longer period,” he said.

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Henry Irving, the head of audit and assurance at chartered accountancy body ICAEW said:

This does show there is a need for the firms providing non-FTSE 350 audits to deliver the same improvements as seen in the FTSE 350 and keep pace with evolving audit quality.

Non FTSE 350 companies have less financial reporting resources than larger listed companies and so we acknowledge it may be challenging for the auditors working in this part of the public interest entities market to achieve this, however improvements must be made if all public interest entities are to be audited to a consistent standard.

The FRC has target of 90 per cent of audits to meet the “no more than limited improvements” benchmark.

FRC executive director for audit and actuarial regulation Melanie McLaren said: “High quality audit underpins public trust and confidence in business.”

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