Clients blind on audit quality

The UK ’s largest auditors fail to provide enough information to compare one
firm’s quality against another.

This is the verdict of the regulators, who want audit firms to produce hard
facts to back up claims about audit quality amid criticism from investors that
it is near impossible to compare one auditor against another.

The Professional Oversight Board (POB), which sits within the UK’s reporting
regulator the Financial Reporting Council, believes the audit industry should
produce more quantitative data to better equip investors and companies with the
tools needed to scrutinise their auditors.

Paul George, director of auditing at the POB, said that at the moment it was
difficult to distinguish one firm from another. “We believe it is very important
that auditors compete on quality.

“The challenge is how can auditors demonstrate quality and those that use
their services assess it.”

He would like to see auditors make better use of their annual transparency
reports, which now include information on audit quality programmes, remuneration
policies and a range of other internal policies, but fail to produce hard facts
that can be used to compare one firm against another.

“While we are seeing increased use of the (audit quality) framework in
transparency reporting, it remains a challenge to distinguish one firm from
another through such reports,” he said.

The move has already won tentative support from the investor community. The
Association of British Insurers (ABI), which represents 20% of investments in
the London stock market, said there was little information in the public domain
to compare auditors.

Michael McKersie, assistant director capital markets at the ABI, said he
would welcome more comparative information. “The relative lack of hard
quantitative reporting data on the audit firms and global networks has been… a
concern. Comparability is really important and we have, in the past, seen no
n-comparability here as a problem.”

Audit firms compete primarily on cost, reputation and industry expertise. The
inclusion of comparative information would not only place pressure on the audit
firms to back up claims about quality, but would also help audit committees in
companies to explain why they opted for a certain firm.

Only last month the POB raised fresh concerns about audit quality after it
noticed some firms were rewarding staff for attracting business at the expense
of promoting audit quality. This year the POB reported that industry giant
PricewaterhouseCoopers changed its bonus criteria to emphasise business growth,
which jumped from 25% to 40% as a proportion of its KPIs, over audit quality,
which dropped from 25% to 20%.

The inspection unit also found that in one case PwC staff were told to reduce
audit hours by 5%.

At the time Richard Sexton, head of assurance at PwC, said the firm’s
commitment to quality was non-negotiable. “If we let quality drop then our
reputation drops and we may as well not be in the business.”

The POB also inspected PwC’s Big Four rival KPMG and found “the achievement
of audit quality objectives does not have as significant an impact on partners’
overall performance assessment as their achievements in other roles.”

KPMG, in its transparency report, said it did not compromise on quality.

Further reading:

Comparability must be the way

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