FRC: Audit firms must pull their socks up

AUDIT INSPECTORS have questioned major firms’ attempts to boost audit safeguards, saying in the current climate that “it would be prudent to show more vigilance”.

Paul George (pictured), director of the Financial Reporting Council’s Professional Oversight Board, said that firms are having to defend themselves before the House of Lords and the European Commission and at such a time “they can’t get things wrong”.

POB’s Audit Inspection Unit report released today showed a small improvement in FTSE 350 audits, though “a significant proportion” of those by smaller firms “remain of concern”.

Last year, quality was of serious concern in four of the FTSE 350 audits assessed, whereas this year just one fell into this category. Nevertheless, George said that the relatively small sample means several more years’ improvement are needed before it will be possible to indentify a trend.

AIU inspectors examined policies and procedures at the Big Four, BDO, Grant Thornton and 12 smaller firms; the reports will be published later this month.

Concern was expressed over smaller firms taking on multinational group audits that were beyond their resources and expertise. At the same time, auditors of UK arms of global companies were warned to ensure that they have sufficient evidence to support their audit opinion and to be wary of relying too heavily on the group audit opinion.

Professional scepticism was highlighted for firms of all sizes, particularly in key areas such as the valuation of assets and impairment of goodwill. George said the debate on scepticism “has moved on” from the days when firms protested their innocence: “The regulators agree that scepticism is of concern, so the firms have to sit up and take note; they have to publicly show they have appropriate safeguards, or they’ll get nowhere.”

Non-audit services should not be allowed to compromise independence despite the “current economic climate [leading] to a decline in fee income”, and the same was said for audit quality, which the POB warned should not be allowed to suffer.

George described the overall picture as “mixed”, with audit quality “overall the same or better”. However, he added that “far too many remain in the bottom category”. This is particularly problematic among smaller firms, in part because they enjoy less attention from the POB. Big Four and leading mid-tier firms have their audits examined year-on-year and therefore have “a better understanding of what good looks like”.

Those who have received guidance worked hard to act upon it, with demonstrable improvements. However, smaller firms receive fewer visits because their more modest clients do not always merit the attention of the AIU and there are more of them to inspect. Even those who receive a follow-up review might lack the opportunity to discuss new risks and changes to the business environment.

George admitted this was an area in which the FRC hopes that professional bodies will step in to ensure improvements are made. Smaller firms that cannot afford retraining programmes in response to AIU findings should share learning, he suggested, calling on the institutes to help in this regard.