Tuesday 5 November 2019 4:46 pm

Watchdog says accountancy firms failing to challenge management of firms they audit

Audit watchdog the Financial Reporting Council (FRC) today warned that the top firms were failing to be robust enough in challenging management of the companies they audit.

The audit sector is in the political and regulatory spotlight following company failures such as the collapse of travel agent Thomas Cook and outsourcer Carillion.

The FRC today said “audit quality is still not consistently reaching the necessary high standards expected”.

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It flagged challenging management and performing routine procedures such as revenue recognition as particular concerns.

The FRC’s executive director of supervision David Rule said: “At a time when the whole audit market faces reform, we expect audit firms to make audit quality their number-one priority and to have effective programmes of work to deliver consistently high standards.”

Other shortcomings identified include year-on-year familiarity with audited companies leading to the same approach being followed even when changes in the business or trading environment demand a different strategy.

The FRC said audit teams too often accept unrealistic deadlines, resulting in inadequate work.

Read more: FRC watchdog probes EY audit of Thomas Cook accounts

It also said audit teams too often accept what they are told by management, rather than questioning its plausibility and drawing on specialists to form their own view.

Rule said: “Inconsistent quality erodes confidence in the profession, which can lead to diminished trust in business. Stakeholders and investors rightly demand high-quality work on all audits.

“While we see many examples of high-quality audit, our inspectors are still identifying too many audits which require significant improvements. Inspections show that challenge of management is a particular area of concern on which audit firms need to focus.”

The watchdog said it would start to publish summaries and grades from its annual inspections of sample audits of listed firms.

The pilot would apply to audits from March 2020 and name the audit firm and customer being audited – but only if both parties give their consent.

The FRC’s latest inspection round found all of the top seven firms – the Big Four plus Mazars, BDO and Grant Thornton – had failed to reach the target that at least 90 per cent of audits inspected should be “good” or requiring only limited improvements.