Wednesday 6 May 2020 12:01 am

Regulator calls for early interventions in poor audits to help stop scandals

The audit regulator today called for accountancy firms to flag poor quality audits sooner to help prevent corporate scandals.

The Financial Reporting Council (FRC) said tools for spotting signs of poor quality audits should be used more effectively, following a major review of their use.

Last year all of the UK’s leading accounting firms failed to hit audit quality targets for the second year in a row, with Grant Thornton and PwC singled out to join KPMG under tougher supervision.

This week the FRC said it had launched a probe into EY’s audit of scandal-hit NMC Health.

“If used properly, audit quality indicators (AQIs) are a vital tool in helping audit firms detect audits at risk of not meeting necessary standards and for audit committees to hold audit firms accountable,” the FRC said.

The FRC found that most monitoring of AQIs across the largest audit firms takes place after audits are completed, rather than prior to or during the process.

After a review of the use of AQIs by the six largest audit firms the FRC recommended firms focus on forward-looking and granular AQIs to ensure they are identifying early interventions which could prevent deficiencies in audits.

Some other countries have adopted initiatives where audit teams report AQIs specific to individual audits directly to audit committees.

The FRC said it plans to consult publicly on proposed standards for disclosure of AQIs by UK firms.

The FRC’s executive director of supervision, David Rule said: “Audit firms need a relentless focus on improving audit quality. Our review found that audit quality indicators, if used correctly, can help firms take decisive and immediate actions to improve audit quality.

“Public reporting of a consistent set of audit quality indicators is required to provide companies and investors another window on audit quality. It is clear that improvements are needed in this area and the FRC will be consulting on proposals in due course.”

Stephen Griggs, managing partner for audit and assurance at Deloitte, said: “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.”

EY said in a statement: “We welcome the FRC’s thematic review and will be carefully considering the findings as part of our continuous focus on audit quality.”

A PwC spokesperson said: “We are committed to enhancing audit quality and look forward to contributing to the FRC’s consultation in due course.”