AQI 2020: Mazars improves on previous year at time of growth
15 Jul 2020
The FRC is calling on mid-tier firm for extra rigour as it takes on larger and more complex audits
15 Jul 2020
Four out five audits carried out by Mazars were found to be good or needing limited improvement, according to the latest Audit Quality Inspection report carried out by the Financial Reporting Council. Only one audit was found to need improvements.
Last year, Mazars had three audits that were classed as good or requiring limited improvements, with one requiring improvement and a fifth in need of significant improvement.
The results will be seen as a vindication of the firm’s efforts to break into the Big Four dominated larger company audit market, and comes at a time when other mid-tier firms have received disappointing results from the AQI process.
However, the firm could be a victim of its own success, with the FRC vowing to review more audits in the next cycle of reports.
The FRC report states: ‘The firm is experiencing significant growth with changes in its audit portfolio and its appointment as auditor on larger and more complex audits. This calls for more rigorous, effective management and quality control systems.
‘The firm should continue to strengthen audit quality initiatives and focus, as applicable, on resourcing, formalisation of sector-specific guidance and work programmes to supplement the firm’s overall audit methodology and addressing audit quality in relation to both individual audit findings and firm-wide issues raised.
‘In view of the above, we intend to inspect a higher number of audits as part of the 2020/21 inspection cycle.’
The FRC identified issues in all of the firm-wide areas reviewed in the current year which Mazars needs to address. Some of the findings on partner and staff matters were similar to those raised in its 2016/17 inspection. However, the report added that the firm has made progress in addressing prior year findings in relation to independence and ethics and has improved the consultation and monitoring processes for non-audit services.
Weakness were identified in relation to testing inventory existence and valuation at one audit; the audit team did not assess or provide evidence on its understanding of management’s processes and controls over the inventories’ existence and valuation.
The FRC also called on the firm to improve the consideration of judgments in key areas such as valuation of expected credit loss for financial instruments.
A number of partner and staff matters were also highlighted as areas for improvement. The FRC found significant weaknesses in staff compliance with the firm’s requirements around objective setting and appraisal completion. As of April 2019, fewer than 40% of staff had appropriately completed their FY18 appraisal in the firm’s performance management system, and only half had set objectives for FY19.
Mazars was also urged to enhance the significance of quality in determining partners’ performance ratings and remuneration. According to the report, the firm’s processes, partner performance ratings and variable remuneration may be positively or negatively adjusted as a result of audit quality, but in practice such adjustments were typically limited in their size and impact.
Phil Verity, Mazars Senior Partner, said: ‘We are fully supportive of the FRC’s efforts in holding firms to account, and in demanding improvements in the quality of audit work. The restoration of trust and confidence in the audit profession will be built on the foundation of high-quality audits.
As a firm, we are pleased that the investments we have made in audit quality, people, culture and infrastructure are evident in the FRC’s findings, and we will continue to build upon this positive momentum.’
Verity said the report highlighted a number of good practice examples, including testing of the valuation of insurance technical provisions, delaying sign-off of the auditor’s report due to a number of factors including potentially material unreconciled differences in key account balances, and encouraging the right culture and audit team behaviours as part of the firm’s audit quality initiatives
‘As a firm we appreciate the challenge of the FRC review as it provides us with an objective measure of audit quality and, alongside our own internal reviews, aids in the identification of areas we need to further focus on in going forward,’ he said