SERIOUS CONCERNS have been raised about some of Grant Thornton and BDO's listed company audit work in a review carried out by the profession's watchdog.
In a series of check-ups of the firms' work, the FRC's review team found roughly a third of audit engagements inspected in need of significant improvement, with both firms taking flack for a lack of professional scepticism.
Of the ten Grant Thornton audits inspected, five were performed to a good standard, the FRC's Audit Inspection Unit said, but warned the firm against letting its growth strategy damage audit quality.
"Emphasis is given to the quality of the firm's work as a means of achieving that growth...Nevertheless, there is...a risk that audit quality may be adversely affected," the review team said.
Specific failings related to the sufficiency of audit evidence identified by the AIU iinvolved financial assets and intangibles, the carrying value of fixed assets and the loss of audit work papers.
In response to the findings, Mark Cardiff, head of audit at Grant Thornton, said the firm is "further refining" its practices to ensure its "reputation for being committed to the highest levels of audit quality remains.
Two of BDO's audit engagements were performed to a good standard, while two required significant improvement. The inspection team carried out one follow-up review of a previously inspected audit and expressed disappointment that certain issues "had not been adequately addressed" by the firm.
The AIU expressed concerns about the level of professional scepticism applied on five audits. In one instance, the audit team failed to appropriately challenge the inputs to management's collective impairment model, while on a further audit, there was a lack of challenge in relation to valuing plant, machinery, land and infrastructure on a fair value basis.
BDO was also instructed to review its audit strategy and remove any references that could be interpreted as focusing on the cross-selling of non-audit services to audited entities. According to the AIU, the firm's audit stream business plans sates that it will be "increasingly aggressive on prices" where it has "excess capacity at times in the year or the prospect is likely to generate significant secondary spend."
"The inference that fees should be set lower if significant non-audit fees are likely to be earned is contrary to the Ethical Standards," the AIU said.
In response, BDO said it recognises "the importance of enhancing certain areas" following the review team's findings and has made "considerable progress in implementing actions to address these".
Last year, BDO earned £1,98m in audit fees and £793,820 in non-audit fees from its FTSE 350 work, according to Financial Director's 2013 Audit Survey. Grant Thornton earned £1.03m and £1.71m from audit and non-audit fees respectively.
Interesting read / findings, raising issues relating to audit quality in Listed firms is an important issue undoubetly. The thirst for growth and a possible corresponding fall in audit quality (not the first time it would have happened) proven / unproven is a casue for concern and may require some conclusive research in the area.
However the abovementioned debate aside, while reading the article I did witness a slight eyerow raise as to the timing of this article.
It would be interesting to see what the AIU outcome would be on the BIg4 following on from their prior year results.
Posted by: Amim.S, 25 Mar 2013 | 17:35
so they failed 2 out of 4, and the fifth one on follow up was not very good either? so what kind of average is that? Also please help me understand - if an audit firm promises to lower its audit fee on the promise of selling additional advisory work, how is that firm really "independent"? Putting aside the conflict for a minute, I would think that a price that is just too low to begin with is an independence issue (as clearly no firm in their right mind would take on a public company audit risk without fair compensation, unless they thought that compensation would come from other sell through work - so how does that make one independent?). Also seems pretty stupid to include the cross selling guidance in your audit material - talk about a red flag. And these guys want to "replace" the other Big 4?
Posted by: zacjik, 27 Mar 2013 | 13:59
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