Inspectors call for ‘significant improvement’ in major audits

Two FTSE 100 audits needed “significant improvement”, according to an annual
review of the UK’s largest eight audit firms released this week.

Auditors have also been accused of altering documents before handing them to
regulators and putting cost savings ahead of quality, in the review by the Audit
Inspection Unit (AIU). It has raised a number of concerns following its
inspection of 109 audits in the UK.

The FTSE 100 audits found to be wanting were among 14 of concern, lifted from
listed companies on AIM and the FTSE 350.

The report also found some cases where partners signed audit reports before
the audit was complete and, in one instance, an auditor tried to alter an
internal file after the AIU requested it. The report also found auditors had
changed their internal materiality thresholds, reducing their workload, and had
not applied enough scepticism to internal asset valuations.

“In particular, in certain cases, it was unclear from the audit files whether
the audit teams had obtained an adequate understanding of the basis upon which
the prices used had been determined,” the report stated.

The release follows a joint Financial Services Authority/FRC report, released
this month, which found auditors displayed a “worrying lack of scepticism” in
their scrutiny of managements’ valuation models. The AIU report also found
auditors were sending work to internal offshore service centres to reduce costs
which, it believes, sent the wrong message to partners.

Paul George, director of the Professional Oversight Board which carried out
the inspections, said auditors needed to change their behaviour, and show more
scepticism when inspecting management judgments.

“We continue to find a rump of audits which don’t meet the standards we
expect. To eliminate this will require not just changes to policies and
procedures but also behavioural changes to ensure there is sufficient challenge
to management,” he said.

“Developments in auditing have not kept pace with developments in financial
reporting,” George added.

Liz Murrell, director of corporate reporting at the Investment Management
Association (IMA), said investors are worried about audit quality, when auditors
themselves are under commercial stress. “In particular, investors are concerned
in the current economic climate that fee pressure on audit firms could impact
audit quality,” she said.

PwC’s head of audit, Richard Sexton, said audit quality was the “foundation”
of the firm’s practice, while also conceding the need for reform. “The integrity
of our people and their behaviours are also vital components of a quality audit…
Process alone will never be the answer,” he said.

Oliver Tant, UK head of audit at KPMG, said he is “acutely aware” of the need
for auditors to be sceptical. “We are not complacent, however, and look forward
to a wider debate across the profession on the issue,” he said.

The AIU will release reports on individual audit firms in September.

In our view

Auditors have long conceded that there is a need to reform audit – but where
they talk about procedures and structures, regulators talk about attitudes and
behaviours. The industry seems intent on changing the structure of audit.
Regulators want to change auditors’ attitude.

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