The Audit Inspection Unit (AIU), which forms part of the Financial Reporting Council, has published a series of scathing audits into the six largest accountancy firms.It has attacked the industry for failing to meet accounting standards as well as a lack of consistency across all firms.
The audits come at a time when there is increasing pressure to overhaul the industry that has experienced a lack of competition and issues around independence.
The inspections covered the Big Four auditors along with Grant Thornton and BDO on work they carried out between July 2009 and April 2010.
Despite some positive points, all six failed to ensure they adequately challenged management assumptions, or consistently demonstrated enough professional scepticism.
According to the AIU all were guilty of failing to check financial statements and management assumptions with enough analysis.
Recommendations
For Ernst & Young, the AIU recommeded the following: “Audit teams need to demonstrate appropriate scepticism in assessing growth rates which appear to exceed historical trends and the impact of changes in the client’s market.”
KPMG was also advised to “Consider the need for further action to improve consistency of work performed on key judgement areas”. It was urged to “redress as a priority our recurring findings in relation to substantive analytical review where there are implications for the sufficiency of substantive testing and as a result the overall audit evidence obtained”.
PwC was censured for problems with its assessment of goodwill at two FTSE 100 companies: “in particular the appropriateness of key assumptions and the adequacy of related disclosures”.
It also made note of PwC’s weakness in the majority of its reviewed audits in relation to the auditing of revenue and issues with work led by an increasing number of audit directors rather than partners.
Both PwC and BDO were also criticised for the handling of international bank subsidiaries, particularly on provisions made against loan books.
Deloitte was informed that nine of its 13 audits were performed to a “good” standard, three were acceptably carried out and one was in need of “significant improvement” – the latter relating to the group audit of a company listed on the Alternative Investment Market (AIM).
Insufficient evidence of the AIM-listed company’s financials was gathered in the case highlighted and the firm “did not properly fulfil its responsibilities as group auditor”.
Visit the FRC website for the public reports on individual firms (2010/11).