Small firms are increasingly falling short of the accounting standards achieved by their larger counterparts, according to the Financial Reporting Council (FRC).
The FRC deemed some 81% of FTSE 350 audits reviewed in 2016/17 as requiring no more than limited improvements. This compared with 77% in 2015/16 and 70% in 2014/15.
However, just 72% of smaller companies outside the FTSE 350 required more than limited improvements in 2016/17, highlighting a growing quality gap between small and large firms.
Areas where judgement is involved were among those identified by the FRC as requiring further improvement by firms. These included impairment reviews, asset valuations and provisions.
The independent regulator also named the design and execution of audit procedures relating to revenue recognition as well as the systems and arrangements for ensuring compliance with ethical and independence requirements.
Deterioration in quality at smaller firms was enough to offset the accounting improvements made at larger companies. As a result, the FRC reported no overall change in audit quality for the year.
The FRC is aiming for 90% of FTSE 350 audits to require no more than limited improvements by 2018-2019.
“High quality audit underpins public trust and confidence in business. Audit firm leaderships’ focus on audit quality is a key driver of good audits and is vital to promoting a culture of continuous improvement,” said FRC executive director Melanie McLaren.
FRC, an independent regulator responsible for promoting high quality corporate governance and reporting, inspects around 140 audits of listed companies each year to assess their quality.