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KPMG audit quality criticised in FRC review

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THE quality of audit work undertaken by the top six firms has improved with only KPMG found to have audits in need of significant improvement, the FRC said Thursday.

Out of the 104 audits were inspected for 2015/16 – 89 of which were undertaken by the Big Four – only two audits, undertaken by KPMG, were identified as needing significant improvement. Of the remainder of KPMG’s audits, 14 were identified as good and six required improvements.

In an unusual move, the FRC released lengthy individual reports for PwC, Deloitte, KPMG, EY, Grant Thornton and BDO but did not release any overarching analysis or recommendations. Overall, 77% of audits were identified as requiring only limited improvements.

The FRC is targeting that all the firms it inspects to make continuous improvements such that, by 2019, at least 90% of FTSE 350 audits reviewed will be assessed as requiring no more than limited improvements.

FRC executive director for audit Melanie McLaren said: “This year’s reports on our reviews of individual audit firms reflect the FRC’s focus on promoting continuous improvement in audit quality.

“For the first time, we asked the firms to carry out a root cause analysis into each of our key findings before developing proposed actions and discussing these with us. The firms responded positively to this request and engaged in a constructive dialogue with us on the outcome of their work and how this had informed the actions they intend to take. We are pleased that the firms have recognised the opportunity to demonstrate their commitment to audit quality.

“We will be reviewing the implementation of firms’ actions and the extent to which they are effective in practice in enhancing audit quality.”

KPMG UK head of audit Adrian Stone said: “We are really concerned that the FRC’s inspection team rated two engagements as requiring significant improvement. However, we are also pleased that the FRC found a significant increase in the number of our highest rated engagements. We believe this is why we have won more audit tenders than any competitor since the audit rotation market shift began three years ago.  Of course, we will never be satisfied with the inconsistency in our performance evidenced by the lower grades.

“We invest substantially in our audit business to ensure we are providing the highest quality reports. For example, we have more than doubled our investment in data and analytics in the last three years; we have invested in more senior quality and risk resource, resulting in an increased salary cost of 26% in the last three years and have increased the number of audit risk specialists by 15% over the last five years. Overall, our audit specialists are now receiving more training, more regularly.

“To achieve consistently high levels of audit quality there is still more to do to ensure our guidance is applied in every case. In some instances, we believe we have applied the correct approach, however, the FRC has disagreed. The AQR is therefore a useful vehicle for clarifying complex areas.

“We appreciate the FRC’s effort and constructive approach and welcome the external perspective provided by the feedback in their annual quality report. We will continue to invest in and improve our audit service so that we go beyond the FRC’s published aim that at least 90% of FTSE350 audits reviewed should require no more than limited improvements.”

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