FRC: Auditors must ‘redouble’ efforts to fix inconsistent audit quality in light of COVID-19
The Financial Reporting Council (FRC) has said that auditors must redouble their efforts to remedy inconsistent audit quality in the wake of the unprecedented economic turbulence caused by COVID-19.
In its Developments in Audit 2020 report released today, the regulator reports audit quality remained too inconsistent in the most recent round of inspections, with 49 out of 130 audits inspected needing either improvement or significant improvement. This inconsistent audit quality was found in audits that were completed before the impact of the COVID-19 pandemic.
Insufficient challenge of the management of audited entities was the most common audit failing identified across all inspections. While supporting evidence for forward-looking judgements can be difficult to obtain, on too many occasions the inspections found auditors only corroborated management’s assumptions, rather than challenging them.
The health and resilience of the audit market was also a key focus area in the report. The concentration of the FTSE 350 audit market, the limited choice available for these companies to obtain a high-quality audit, and the market’s vulnerability to the failure of one of the Big Four firms remain risks to market resilience.
The accountancy sector is under increased scrutiny after a series of scandals where audit firms failed to identify failures. Corporate collapses such as Carillion, BHS and Thomas Cook have increased pressure on auditors and led to increased calls for reform in the sector.
In July, the regulator ordered the UK’s Big Four accountancy firms, PWC, Deloitte, KPMG and EY, to separate their audit practices by June 2024.
Commenting on today’s report, David Rule, the FRC’s executive director of supervision, said: “Auditors have a key role to play in ensuring users of annual reports have reliable financial information. Despite there being examples of good auditing, auditors are still not delivering to a consistently high standard.
“COVID-19 has emphasised the importance of high-quality financial reporting, alongside challenging and rigorous auditing. During the pandemic auditing has become more challenging and audit firms need to redouble their efforts to deliver the required consistency in audit quality.”