FRC report: more questions than answers

The FRC’s report into the quality of audits must have cheered many in the
profession. Not only did it speak glowingly of the quality of auditing in the
UK, it also – not in the body of the report but in its absence, you might say –
cleared any questions of non-audit work compromising audit quality.

Or did it? Questions are being raised about the report’s thoroughness, its
independence, and its attempt to actually ask the relevant questions in terms of
auditing, so much so that one critic says, rather alarmingly, that it may even
have ‘sown the seeds of the FRC’s own destruction’.

The FRC’s annual report disclosed last month that the watchdog spent £1m on
the Audit Inspection Unit last year, whose master work, and main achievement
thus far, was this report.

Was the money well spent? As far as auditors were concerned, arguably.

Leaving aside initial reports which suggested the report had somehow issued
damning criticisms of audits in the UK, its main findings served to bolster the
profession.

It identified ‘no systemic weaknesses’ and only a few glitches in the system;
engagement partners stuck around for too long, partners were often appointed
because they were good at driving sales rather than audit quality, and two
companies were referred to the FRRP for reputed problems with their accounting.

The report itself did not mention non-audit issues, but Andrew Jones, head of
the Audit Inspection Unit, did say to Accountancy Age later: ‘We looked
at a range of audits and had varying degrees of concern. Some were done very
well. Of those that were done less well, one could not say it was because of
apparent conflicts of interest.’

So has that satisfied audit’s sternest critics? Not in the least.

Prem Sikka, professor of accounting at Essex University, says the report was
extremely disappointing, not least in the thinness of its explanation of its
methods: ‘They do not even explain what they did and how they did it,’ he says.

If the body wanted to get some idea of audit quality issues, it could have
looked at reports conducted by the DTI and the JDS into audits, he adds: ‘A key
issue has always been auditors selling other services.’

Though the AIU did tell Accountancy Age that it found no issues
there, there are suspicions that those assurances were not fully followed up,
coming only an after-thought. Sir John Bourn, the head of the FRC, even tried to
suggest at a press conference associated with the report that the report into
audit quality was about a different issue to the audit/non-audit debate.

Yet questions about non-audit services are absolutely central to questions of
audit quality.

Observers are raising key questions about the extent to which auditing has
become a box-ticking approach, in contrast to the rhetoric about
principles-based auditing. They ask why the UK keeps producing more auditing
rules and guidance if it operates a principles-based system.

Box ticking, they believe, means audits are rushed, open to falsification and
leave central issues ignored.

The AIU again failed to question the Big Four on any of those issues. One
extreme way of viewing this, according to Sikka, is that the omissions may have
‘sown the seeds of the FRC’s own destruction’.

If it doesn’t ask the big questions, will anyone trust it, or simply regard
it as ‘chaps regulating chaps’?

Does any of this matter? After all, the Big Four, and auditors in general,
have always had strident critics whose opinions are well known on these issues.

The problem arises when investors become concerned. Auditors are desperately
trying to convince investors to come aboard on questions of proportionate
liability.

Investors are understood to have welcomed the fact that there was a report
into audit quality, but been disappointed that the report did not ask the
questions it could have done.

The FRC will have to get that crucial community on board if it wants to have
any credibility in regulating audit.