The overall quality of auditing in the UK remains unchanged. This is the primary thrust of a new report from the Financial Reporting Council (FRC), published on the completion of its first year as the Competent Authority for Audit (2016/17).
To the casual lay reader the report might appear slightly self-contradictory. The summary release says that a focus on, and investment in, improving audit quality, together with promoting a culture of continuous improvement, is beginning to pay off.
The FRC says that this is particularly the case for audits of larger companies where it has targeted improvement. However, it says, the picture is not consistent across all firms, market sectors and audit procedures.
Squaring the circle
Melanie McLaren, the FRC's executive director for audit and actuarial regulation, helps square the circle. In the monitoring of audit quality she has yet to see overwhelming evidence of improvement in all sections of the market and consistency.
But she adds: “Firms are, though, investing in improvement measures, and those audit committees surveyed report that they are seeing evidence of good quality audit.”
High profile accounting failures, as well as the results of audit monitoring, continue to highlight cases where auditors have not met expectations. This is also the area where the FRC finds the greatest number of issues. The scandal at BT Italia springs immediately to mind.
PwC in an unwelcome spotlight
PwC was the auditor thrust into an unwelcome glaring spotlight in that case. The Tesco accounting scandal of 2014 is another. PwC was the auditor there too. Morrisons, another of the UK's major supermarket retailers, came under scrutiny for similar reasons in 2015.
We asked McLaren if she could discuss these cases but the short answer was no. “We cannot comment on open investigations,” she replied.
Reutrning to the FRC report, the key message from audit monitoring activity in 2016/17 is that the overall standard of audit work being done for FTSE 350 companies in the UK is improving.
Audit opinions are reached independently and are generally well supported by audit work. There is evidence of continuous improvement, particularly for larger audits. However, a higher proportion reviewed outside the FTSE 350 required more than limited improvements.
As a result the FRC reports no overall change in audit quality across all the audits it reviewed in 2016/17. Across all audits, outcomes are inconsistent between the firms, with areas of identified good practice such as enhanced quality control procedures.
The report includes an overview of the FRC’s work in setting auditing policy and standards, how it is working to enhance the effectiveness of audit committees, its oversight of the profession and its audit monitoring and enforcement activity.
The FRC says that greater transparency of audit has been achieved through extended reporting, now being rolled out for more audits. Broadened perspectives on audit quality ensure a focus on sustained improvement, it adds .
The FRC has a bite as well as a bark. It says it has enhanced its enforcement. It says it has issued more than £14.2m of sanctions on auditors and audit firms in 2016/17 and sets out the outcomes and lessons to be learnt from concluded investigations.
On a final footnote, the FRC notes that in total 213 (61%) of the FTSE 350 have announced they have completed a tendering exercise in the past six years and 74% of tenders have resulted in the appointment of a new audit firm.
EU requires re-tendering
This is in line with EU rules that came into force in 2016. McLaren notes that these require re-tendering every 10 years and rotation every 10 years. This compares with the status quo ante in which PwC in one form or another audited Barclays for nearly 150 years, she adds.
This in itself demonstrates the significance of the 74% statistic. Competition fans might be disappointed though. Overall, the Big Four firms have increased their total share of FTSE 350 audit market from 95% to 97% (based on the number of audit clients).