According to the most recent quality review results from the U.K. Financial Reporting Council (FRC), KPMG's improvements led each of the four largest audit firms to return no audits that required significant improvement during an inspection cycle for the first time in the previous five years.
Along with Grant Thornton UK, Deloitte, EY, KPMG, and PwC were all praised for the successful outcomes of their reviews. While BDO and Mazars will be monitored more closely after submitting "unacceptable" results.
Four (or 33 percent) of the 12 audits examined by BDO were found to need significant improvement. Three out of the eight audits Mazars reviewed (38%) met the same standard.
According to a press release issued by the FRC Chief Executive Sir John Thompson on Wednesday, "while it is encouraging to see some improvement in audit quality at the largest audit firms, consistent, long-term improvement is still required across the market. We will monitor closely the potentially negative impact on the public interest that the de-risking by firms of challenging audits may have on audit quality."
Overall, compared to 71 percent in 2021 and 67 percent in 2020, only limited improvement was needed for 75 percent of the 96 audits that were examined during the cycle. 42 of the audits that were examined were performed at FTSE 350 companies.
Last year, KPMG came under fire after nine out of the 22 audits that were examined (or 41 percent) needed more than minor improvement, with one audit being found to have significant flaws. KPMG's audits of banks and other similar entities were specifically singled out, and the FRC expressed its opinion that the firm did not provide its teams with enough expectations and guidance.
Only three of KPMG's 19 audits that were examined for this year's results (or 16 percent) needed more than minor improvement. Although improvements have been made, KPMG will continue to be closely watched in this regard, according to the FRC, which said its examination of the firm's banking audits was "intensive."
The FRC reported that "the firm responded to our (2021) findings by refreshing the plan. The planned improvements to its procedures and guidance were not all delivered in time for 2021 year-end audits. … A significant amount of further improvement work is planned for delivery during 2022, which our supervision work will focus on."
KPMG concurred that more work needs to be done.
According to the company's report, "In response to the FRC’s findings from last year, specifically on banking audit quality, we have undertaken an intensive program of activity and made significant investment in our banking audit quality improvement plan. We are pleased to see an improvement in our banking inspection results this year, although we recognize there is more to do."
In comparison to the other Big Four, Deloitte and PwC performed the best this year, returning three audits that needed more than minor improvement. While PwC had 18 audits examined, Deloitte had 17 audits. Six of the 17 audits that EY had inspected need more than minor improvement, but none were found to have serious flaws.
There were no audits performed by Deloitte, EY, or PwC last year that needed significant improvement.
BDO and Mazars did not fare as well as Grant Thornton, even though all five of its audits that were examined during the cycle needed only minor improvement.
Problem areas at BDO included revenue, auditing financial services companies, doubt and resistance to key judgments, and quality control and review. The FRC stated that as a result of the deficiencies, it will inspect more audits the following year and require the company to regularly report its progress in the interim.
BDO has documented three years in a row where audits have needed significant improvement.
The firm responded, "We acknowledge that this is the third year that the firm’s results have fallen short of the high audit quality expected by both the firm’s leadership and the regulator. … Our strategic plans are focused on adding quality resource to the audit stream, managing the size and shape of our audit portfolio, strengthening central infrastructure and tools, and providing high-quality development for our people through a quality transformation program to deliver on our commitment to serve the public interest by consistently delivering high-quality audits."
Revenue, provisions for anticipated credit losses, estimation and judgment, and insufficiently strong quality control procedures were all deficient at Mazars. Next year, the company will also face a more thorough inspection and be required to provide a report on the quality advancements it has made.
As part of a larger quality plan, Mazars stated, "We are fully committed to addressing the issues which have been identified as part of our broader quality plan and to achieve quality results that reflect our high standards, whether measured by regulatory or internal assessments."
Both companies have added more clients recently, the FRC acknowledged, but "growth ambitions must also be tempered by a focus on quality first and foremost."
In its overview report, the FRC praised the advancements made by all companies in their technology investments, advances in banking methodology, creation of culture programs, and resourcing strategies. Estimates, impairment, and revenue were common areas of deficiency found across the board, while group audits and fraud risk were areas of good practice.
By fLEXI tEAM