Audit quality threatened by fee pressure

SURE

SURE to reduce fees poses a threat to the quality of British auditing, a leading member of the Financial Reporting Council (FRC) said yesterday, as the body issued its annual reports on the performance of the country’s four largest accountancy firms.
Paul George, the organisation’s executive director of conduct, told City A.M.: “Commercial pressures run the risk of undermining audit quality if firms reduce the amount of work they undertake in order to protect margins.”

“We absolutely believe that an audit needs to be value for money [but] the level of fee pressure that is out there is causing challenges.”

The study reveals that there has been a year-on-year improvement in the quality of auditing, with fewer than 10 per cent of sample audits falling into the worst category.

PwC posted the best performance of the big four, with almost 60 per cent of its sample audits judged to require “limited improvements”.

Both KPMG and Deloitte were judged to have 40 per cent of audits in the highest category, with a further 50 per cent judged to be “acceptable with improvements required”.

At the other end of the scale almost 20 per cent of Ernst & Young audits were considered to require “significant improvements”.

James Chalmers of PwC said: “The AIU recognise we have taken steps to address the matters raised in the previous year. We are demonstrating a positive direction of travel in regards to audit quality, which remains at the heart of what we do.”

But concerns remain about auditors’ “professional scepticism” – their willingness to seek out evidence that contradicts a company’s official line.

“Rather than seeking out evidence to support management the auditor should look for the most appropriate evidence and compare it with the management assertions,” George said.

“We also have concerns around audit teams not being specific about threats and looking at threats and safeguards in a very generic nature, he added”

Deloitte

Six sample audits were “good”, seven audits were “acceptable” and one audit needed “significant improvements”.
Firm should ensure quality reviews have a “direct impact on partner remuneration”.
Teams should “pay more attention to planning and performing the audit of revenue.”

Ernst & Young

Six sample audits were “good”, three audits were “acceptable” and two audits needed “significant improvements”.
Concerns over partners seeking credit in appraisals for “sales of non-audit services to entities that they audit”.
Should review guidance on auditing revenue.

KPMG

Six sample audits were “good”, seven audits were “acceptable” and one audit needed “significant improvements”.
Should emphasise “obtaining direct confirmation of the existence and accuracy of assets and liabilities from third parties.
Need more dialogue with audit committees.

PricewaterhouseCoopers

Eight sample audits were “good”, five audits were “acceptable” and one audit needed “significant improvements”.
Should report “threats to the firm’s objectivity” from provision of non-audit services to audit committees.
Should maintain quality despite competition.