FRC is sounding like a modern day Cassandra
Concerns raised in the FRC's latest round of audit inspections sound strikingly familar. Why has the profession failed to address them?
READING THE FINDINGS of the FRC’s latest round of audit inspections I can’t help but think that the accounting watchdog has become a modern day Cassandra, or, to mix my metaphors, a stuck record that no one ever listens to.
The good news is that of the 85 audits belonging to the top-nine accounting firms examined by the FRC, the number of high quality audits was up. Though this was tempered by the fact the number of seriously flawed audits was also up.
What struck me, though, was that the concerns raised by the FRC – lack of scepticism, cost cutting, ethical failings, auditing of loan loss provisions and impairment testing of goodwill and other intangibles all sound strikingly familiar.
Last summer, in its individual inspection reports on the Big Four audit firms, the FRC warned Deloitte against compromising audit quality and told KPMG to improve its audit of impairments. Similarly, in that year Baker Tilly was criticised for a lack of professional scepticism.
A year earlier, in July 2011, the FRC told PwC to improve its goodwill impairment auditing, while in its review of the top six firms – the Big Four plus BDO and Grant Thornton, all six were found guilty of drawing conclusions without substantial evidence to back them, particularly in tricky areas such as goodwill impairment.
This is not to say that, when specific failings are highlighted, the firms do not move to address them. They do, as the individual inspections of the Big Four firms, released today by the FRC, show.
No doubt many, if not all, of the individual cases mentioned above have been satisfactorily dealt with. And admittedly, the impairment testing of goodwill and other intangibles is an incredibly complex area and standard setters continue to wrestle with banks should account for loan losses.
Nevertheless, it is the same failings that the FRC appears to highlight year on year. Does the FRC’s need more teeth to enforce change? Or do some of its concerns miss the mark?
Like Cassandra, the daughter of King Priam, who was cursed by Apollo so that alll of her prophecies would be ignored, the profession as a whole will carry on as it is regardless of the FRC’s warnings.