An “unacceptably high” number of audits still need improving, according to the UK accounting watchdog’s latest report, amid increasing concerns that the government may scale back long-awaited corporate governance and audit reforms.
The Financial Reporting Council (FRC) today published its latest annual report on UK audits, finding that 33 per cent of all audits still needed improvements.
The news marks the third year running in which around or above 30 per cent of audits were branded as unsatisfactory and in need of improvements by the watchdog.
Of 147 audits inspected, some 41 required further improvements and seven needed “significant” changes.
The report comes amid increasing concerns that the government may scale back an audit reform package, which has previously been touted as the biggest overhaul to British audits and corporate governance in generations, following reports in the Financial Times last week.
The latest findings “yet again underlines the need for urgent reform and robust measures to increase audit quality,” warned the head of policy at the Chartered Institute of Internal Auditors (IIA) Gavin Hayes.
“Front and centre of any audit reform programme should be putting the audit regulator on a statutory footing with the legal powers it needs to do its job effectively, so that it can enforce a stricter audit regime,” Hayes, a member of the FRC’s Stakeholder Advisory Panel, continued.
The audit reform plans, which are being finalised, were prompted by a series of high-profile corporate scandals and collapses including retailer BHS and Carillion.
Earlier this year it was reported that the new reforms could see directors facing fines, suspensions or even having to return their bonuses in the event of a company collapse or serious director failings.
But now a limited version of the rule, which would also be harder to enforce, is expected instead.
Audit groups and investors have since warned the government that scaling back long-awaited corporate governance and audit reforms could lead to more corporate scandals.
In a letter sent to business secretary Kwasi Kwarteng last week, the chief executive of the Chartered Institute of Internal Auditors, John Wood, said stronger regulation of internal controls were fundamental to any effective audit and governance reform programme.
“Audit quality remains mixed across the firms,” FRC executive director Sarah Rapson confirmed in a statement alongside the publication of the annual report.
Professional scepticism, and challenge of management were again flagged as areas “where deficiencies continue”.
The regulator called out the audits by small firms as being “unacceptable,” after it found that two thirds required improvements, despite reviewing a higher number of smaller firms which audit public interest entities this year.
The quality of audits at tier 2 and 3 firms, except for National Audit Office audits, were worse than those of tier 1 firms which include the Big Four firms (Deloitte, EY, KPMG and PwC) and BDO, Grant Thornton and Mazars.
The FRC said it has added resources specifically to supervise smaller firms whose audits must improve substantially. The watchdog said its guidebook on what makes a good audit, published earlier this week, would be “particularly useful for the smaller firms”.
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