FTSE 100 audits require "significant improvement", inspectors find

Two FTSE 100 audits required “significant improvement”, according to an annual review of the UK’s largest eight audit firms, released today.

Auditors have also been accused of altering documents before handing them to regulators and putting cost savings ahead of quality, in the review by the Audit Inspection Unit (AIU).

The report raised a number of concerns following its inspection of 109 audits from AIM and the FTSE 350.

The report also found some cases where partners signed audit reports before the audit was complete and one instance when an auditor tried to alter an internal file after the AIU requested it. Auditors had also changed internal materiality thresholds, which effectively reduced their workload, and had also not applied enough scepticism to internal asset valuations.

“In particular, in certain cases, it was unclear from the audit files whether the audit teams had obtained an adequate understanding of the basis upon which the prices used had been determined,” the report stated.

The release follows a joint Financial Services Authority/ FRC report, released this month, which found auditors displayed a “worrying lack of scepticism” when auditing banks valuation models.

The AIU report also reported that auditors were sending work to company-owned offshore service centres to reduce costs - a practice it believes, sent the wrong message to partners.

Paul George, director of the Professional Oversight Board which carried out the inspections, said auditors needed to change their behaviour, and show more scepticism when inspecting management judgments.

“We continue to find a rump of audits which don’t meet the standards we expect. To eliminate this will require not just changes to policies and procedures but also behavioural changes to ensure there is sufficient challenge to management,” he said.

“Developments in auditing have not kept pace with developments in financial reporting,” George added.

Liz Murrall, director of corporate reporting at the Investment Management Association (IMA), said investors are worried about audit quality, when auditors themselves are under commercial stress.

“In particular, investors are concerned in the current economic climate that fee pressure on audit firms could impact audit quality,” she said.

PwC’s head of audit, Richard Sexton, said audit quality was the “foundation” of the firm’s practice, while also conceding the need for reform. “The integrity of our people and their behaviours are also vital components of a quality audit… Process alone will never be the answer,” he said.

Oliver Tant, UK head of audit at KPMG, said he is “acutely aware” of the need for auditors to be sceptical. “We are not complacent, however, and look forward to a wider debate across the profession on the issue,” he said.

The AIU will release reports on individual audit firms in September.

Further reading:

Audit Inspection Unit

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