The UK’s biggest audit firms are failing to improve the quality of their work because they are not making good use of tools to flag up problems early in the process so they can take action quickly, the Financial Reporting Council (FRC) has found
The FRC wants firms to move to more proactive use of audit quality indicators (AQIs) coupled with a more granular approach.
In its first review of how firms use audit quality indictors (AQIs) internally to detect audits at risk of not meeting necessary standards, the regulator looked at their operation in the six largest firms (PwC, Deloitte, EY, KPMG, BDO and Grant Thornton).
The FRC said that while it was encouraged that the audit firm were using AQIs to highlight audits in need of remedy and to promote good practice so that this can be replicated, their use was inconsistent and had been implemented over different timescales.
In particular, the FRC highlighted that most monitoring of AQIs across the largest audit firms takes place after audits are completed, rather than prior to or during the process, which limited their impact in improving quality.
It argued that If used effectively, AQIs can address past failings in audit quality and signal early warning signs enabling firms to identify immediate remedial action that can be taken.
The FRC also identified several areas in which public reporting of AQIs requires improvements. Firstly, AQIs reported in the UK are concentrated on five areas whilst other countries require firms to report on eight or more.
In addition, publicly-reported AQIs are not easily accessible or comparable across firms, and the FRC found that few audit committee chairs and investors interviewed for the report were aware of published AQIs.
The FRC points out that some other countries have adopted initiatives where audit teams report AQIs specific to individual audits directly to audit committees, and says there is merit in exploring a similar initiative in the UK.
It plans to consult publicly on proposed standards for disclosure of AQIs by UK firms. The timing of this consultation will depend on the Covid-19 pandemic.
David Rule, FRC executive director of supervision, said: ‘Audit firms need a relentless focus on improving audit quality. Our review found that audit quality indicators, if used correctly, can help firms take decisive and immediate actions to improve audit quality.
‘Public reporting of a consistent set of audit quality indicators is required to provide companies and investors another window on audit quality. It is clear that improvements are needed in this area and the FRC will be consulting on proposals in due course.’
The FRC’s 2019 audit quality inspections were scathing about the failure of the biggest firms to demonstrate improvements, despite intense public criticism over a number of high profile audit failure over the previous year.
A quarter of the audits inspected were rated as below standard, and required improvements, with six audits singled out as requiring ‘significant improvements’, having failed to meet even the basic standard expected.