AQI 2019: decline in audit quality at Mazars
10 Jul 2019
Mid-tier firm Mazars, which was recently hired as auditor of Goldman Sachs’ European arm, has seen a decline in audit quality over the past year with AQI inspectors criticising the firm for not fully addressing earlier issues
10 Jul 2019
Only 60% of the firm’s audits were assessed as good in the 2018/19 review cycle, compared to 80%, with the latest audit quality inspection (AQI) reports by the Financial Reporting Council (FRC), suggesting that the firm has not fully addressed some of the problems highlighted in last year’s review.
The FRC said that the overall results were worse than the previous year, with two out of five audits assessed as requiring more than limited improvements, compared with one of five in 2017/18. It also noted that its assessed three audits as requiring significant improvements over the last four inspection cycles.
Mazars has 44 audits within the scope of AQR inspection, none of which are in the FTSE 350.
The regulator stated: ‘Across all the reviews, there are a number of findings that the firm needs to address, some of which are similar to findings from our last inspection.’ The FRC says this indicates quality control procedures at Mazars have not been sufficiently effective.
Specific issues identified in the review include the need to improve consultation and monitoring processes for non-audit services, as well as improvements in the testing of controls including IT general controls.
On one audit, the AQI found weaknesses in the testing of the operating effectiveness of controls relating to premiums and the accuracy and completeness of actuarial data used in the calculation of technical provisions. In a separate case, the IT specialists performed insufficient procedures to test IT general controls and in the other the audit team failed to identify manual and/or general IT amendment controls relating to the accuracy and completeness of data.
In response, Mazars said its analysis suggested some of the issues related to the high turnover of staff in its specialist team in the year and the consequential time lag in them becoming fully conversant with the firm’s audit methodology. It has also hired an experienced IT audit partner.
The FRC says Mazars should also strengthen the testing of revenue for complex revenue streams and improve substantive analytical review procedures.
Issues identified included weaknesses in the substantive analytical procedures performed over revenue, including a lack of corroboration of inputs into expectations, while on an insurance audit there was insufficient testing over the completeness of premium estimates included in the gross written premium and provision for unearned premium.
The AQI report highlighted the need for Mazars to improve the evidence of appropriate challenge in areas of judgement, an issue which was raised in relation to impairment last year. This year’s review found similar issues in other areas, such as the valuation of investment properties, technical reserves and pensions.
These included examples of insufficient evidence to support some of the assumptions used in the valuation of a portfolio of investment properties and weaknesses in the audit team’s evidencing of the appropriateness of certain economic and non-economic assumptions management used to value the technical reserves provision.
The FRC says the firm also needs to do more to improve systems and procedures to ensure compliance with the revised ethical standard. In one of the audits reviewed, Mazars provided VAT and tax support services to a public interest entity’s (PIE’s) parent undertaking that are prohibited under the standard.
Two of the five services provided had not been approved by the audit ‘responsible individual’ and no consultation was undertaken with the firm’s ethics function on whether these services were permissible. The firm’s monitoring processes also failed to identify that non-audit services had been provided in contravention of the ethical standard.
In its response to the review, Mazars said it was ‘extremely disappointed’ this had happened, and had taken action following a root cause analysis which highlighted a requirement for an increased awareness of the ethical standards with regards to non-audit services in some circumstances, as well as identifying that improvements were required to assist teams to more easily see a complete listing of entities within groups that contain an audited PIE.
The review highlighted a wider ongoing issue in regards to ethics, which was also raised in the previous year’s report. This stated that the firm should improve its systems and procedures in monitoring personal independence compliance for partners and staff.
Mazars was judged to have made progress in recording and monitoring partner financial interests and including specific performance objectives for audit quality in partner and staff appraisals, However for staff, the firm relies on annual fit and proper declarations and does not perform compliance testing on financial interests held by staff or have a system in place to record and track staff interests. The latest AQI says improvements continue to be required to the recording and monitoring of staff financial interests.
The AQI report identified areas of good practice at the firm, including the involvement of actuarial specialists in the audit of technical provisions, and the testing of assumptions in payment protection indemnity (PPI) mis-selling provision. Mazars’ governance procedures and the firm’s active involvement with independent non-executives (INEs) was also highlighted.
In its response published in the AQI review Mazars said: ‘We have performed a root cause analysis of each of the findings in this report and developed an action plan that we consider addresses the underlying causes identified.
‘It is particularly important that we understand the root causes for why things go well in addition to understanding the causes for those situations where the outcome is not satisfactory. This will be an area of focus over the coming year to ensure that standards are safeguarded through the firm more clearly learning what leads to the delivery of our highest quality audits.
‘Our response to each of the findings will be the subject of focussed internal monitoring reviews. We are committed to doing all we can to ensure findings are not repeated. We have welcomed the challenge provided by our independent non-executives during the year in respect of our plans to enhance audit quality.’
By Pat Sweet