AQI 2018: BDO judged to show ‘continued improvement’
BDO has received a largely clean bill of health in the Financial Reporting Council’s (FRC’s) annual quality inspection of the firm, with the regulator finding a continued improvement in recent years, with seven of the eight audits reviewed requiring no more than limited improvements, reports Pat Sweet
19 Jun 2018
This compares with the previous year when five audits were judged as good or needing only limited improvements but two required some improvement and one needed significant improvements, while in 2015/16 just 50% of the audits examined were judged as requiring only limited improvements.
In its overall assessment, the FRC said: ‘We have seen an improvement in relation to some of the key findings highlighted in last year’s report, although we continue to identify shortcomings in certain areas (for example, the quality of communications with audit committees on significant findings).’
On some audits reviewed insufficient detail was reported to audit committees and the firm was not monitoring communication of ethical and independence breaches. In one instance, the report did not clearly set out the audit evidence supporting management judgments, while in another the difference between the audit team’s stock variance estimate and management’s estimate was not reported, and in a third case the information provided on the work performed by the audit team’s specialist was potentially misleading.
The FRC wants BDO to improve the timeliness of its training for revised auditing standards across the firm, while it should also look to achieve greater consistency in audit quality control and review procedures and improve the evidence of appropriate challenge in relation to areas of audit judgment.
As with all of this year’s reviews, the regulator assessed the firm’s response to the revised ethical and accounting standards. While BDO has revised most its policies and procedures, the FRC said its systems and procedures for the monitoring of personal financial interests, and for implementing certain other requirements, required improvement.
The firm does not have a system for partners and staff to record their financial interests. It is heavily reliant on manual controls and on individuals managing their financial affairs appropriately to prevent and detect prohibited investments, while the process for the firm’s compliance testing of all partners relating to prohibited financial interests did not address higher risk individuals such as partners with prior year findings, internally promoted partners or new hire partners in their first year with the firm. In addition, the firm does not perform any testing of its staff’s financial interests.
The firm’s monitoring of partner and staff rotation also required a number of improvements. This includes addressing new and revised categories of partners, as well as taking account of previous roles, cooling-off periods and cumulative periods of audit involvement.
In addition, the FRC raised concerns relating to the timing of training on ethical standards for partners and the fact that e-learning for staff was not mandatory. The regulator was also unhappy about the timeliness of arrangements for training in revised audit standards at the time of the review.
While audit work was often performed to a good standard, the FRC highlighted instances where there was insufficient evidence to support how audit teams had concluded on the appropriateness of certain valuation and provision assumptions, and insufficient challenge to management in respect of the appropriateness of the level of inventory provisions.
The regulator cited a number of instances of good practice in audit, including the use of and co-ordination with internal specialists and the use of independent evidence to challenge valuations.
The FRC also reported that BDO has established a comprehensive root cause analysis (RCA) process that enables it to identify why issues arose and to focus on the appropriate actions to address them, as well as identifying high quality audit work.
The AQI report noted: ‘In our previous annual reports, we have highlighted shortcomings in the firm’s use of substantive analytical procedures when auditing revenue. We have seen improved audit work over revenue this year, following training which the firm provided on this area in 2016.’
In its published response to the findings, BDO said: ‘As noted by the FRC in this report we have spent significant resource and time developing a RCA process that is now well embedded within the audit stream.
‘We considered the individual audit file review findings and decided to also include those from our internal audit quality assurance review. We performed root cause analysis investigations on sufficiency of involvement of the engagement partner in the audit and sufficiency of audit evidence included on the audit file.
‘Although we undertook some immediate actions, there are a number of issues, some of them behavioural, that continue to be identified as root causes on a number of our investigations and have an impact on audit quality. We will be sharing the themes arising from the RCA with the more senior members of the audit stream in each local business unit in order for them to determine what initiatives could be implemented locally.’
The firm also stated it now has a clearer process in place for communicating the timing of intended training.
The FRC AQI 2018 review of BDO is here.
Report by Pat Sweet