KPMG has been called out for failing to meet standards in its bank audits for the third year in a row, by the Financial Reporting Council (FRC) in a review published on Friday, that found that a third of large company audits by the biggest UK firms failed to meet standards.
The industry watchdog called out specific concerns about KPMG’s banking audits as well as challenger firms including BDO and Mazars.
Criticism levelled at KPMG, which received the worst scores of the big four accountants with under 60 per cent of its audits in the top category, was particularly scathing.
The FRC said: “Inspection results at KPMG did not improve and it is unacceptable that, for the third year running, the FRC found improvements were required to KPMG’s audits of banks and similar entities.”
The financial watchdog said it would be be “closely monitoring” KMPG to check that its recommended actions are executed “in a timely manner”.
KPMG’s audit head, Cath Burnet, acknowledged “that action taken as a result of previous inspections has not yet consistently yielded the high standards rightly expected of us.”
She said the accounting giant was working on the changes demanded by the FRC but also defended KPMG’s banking audits as “robust” and noted that the review did not call into question the firm’s auditing opinions.
A third of large company audits fall short of standards
The FRC annual review found that 29 per cent of the 103 audits it reviewed were in need of “significant” changes or improvement.
Chief executive officer of the FRC, Sir Jon Thompson warned: “If the UK is to retain its position as a world leading professional services marketplace, and a global financial centre, outstanding audit quality and rigorous professionalism is at the heart of this.”
It said there were recurring problems particularly in areas relating to the audit of revenue, impairment of assets and group audit oversight.
In the Council’s previous review for 2019-2020, 33 per cent of audits were identified as in need of improvement. Thompson, acknowledged that: “this improvement is marginal and significant change still needs to happen to meaningfully improve audit quality.”
The FRC’s annual review covered the seven largest UK audit firms: BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC.
The EY UK head of audit, Andrew Walton, said: “The FRC’s inspection results will be looked at in the context of the wider debate around the future of UK corporate governance and audit, and we are supportive of the case for holistic change.”
The results of the review come as auditors have faced increasing scrutiny since high-profile corporate failures such as Carillion, Thomas Cook and Patisserie Valerie have drawn attention to the failure to spot and report on red flags.
The FRC too has been criticised for its supervision of auditors and, as a result, will transition into the Audit, Reporting and Governance Authority (ARGA) with broader powers.
Iain Wright, the managing director of the Institute of Chartered Accountants in England and Wales (ICAEW), said in its current state: “the FRC’s annual Audit Quality Review process has lost its way.”
Wright continued: “It has become an exercise in compliance checking and the public admonishment of auditors, and it does little to improve audit quality, foster innovation or encourage new entrants into the audit market.”