Audit regulatory inspectors have pulled Grant Thornton up following a review of the audits conducted by the mid-tier firm, saying it was disappointed at the number of audits which required ‘significant improvement’ while its inspection of Crowe Clark Whitehill’s work found that the majority of audits reviewed were of a good standard
The annual report card – one of several of all the major audit firms – was published by the Financial Reporting Council (FRC) as part of its regular Audit Quality Inspections (AQI) which result in a public report.
GT is inspected annually, rather than approximately every two years as previously, and the FRC reviewed eight audit engagements, of which one was a further review of an audit reviewed in a previous inspection. These related to FTSE 100, FTSE 250, other listed and other major public interest entities, with financial year ends between March 2013 and March 2014.
The FRC said three of the eight audits reviewed were performed to a good standard with limited improvements required, and two audits required improvements.
Three audits required significant improvements in relation to one or more of the following areas: insufficient involvement in and supervision, direction and control of group audits; lack of management challenge or professional scepticism in a number of areas of judgment or estimate; and insufficient evidence of appropriate reporting to audit committees.
In its report, the FRC said: ‘ We were disappointed by the number of audits, out of the eight reviewed, assessed as requiring significant improvements and that our further review of an audit assessed as requiring significant improvements during the last inspection again fell within this category.
‘In respect of two of the three audits concerned, we requested that the firm carry out further audit work to determine whether the audit opinion it issued remains appropriate. In both cases the firm has confirmed that further work has been performed and that it considers that the audit reports remain appropriate.’
The regulator said that while GT had considerably strengthened its internal communications about audit quality and its approach to professional scepticism in response to earlier criticism of these areas, inspections on four audits suggested there were still failings in these areas.
On two audits the audit team failed to challenge assumptions about how management used cashflow models sufficiently rigorously, and there were two audits where the audit team did not maintain control over the external confirmation process or evaluate the reliability of evidence provided.
The FRC said: ‘The number of prior inspection findings that have recurred during the current review is disappointing. The firm should consider whether the actions taken to date adequately address the actual root cause of the findings and how those actions can be made more effective.’
The regulator expressed concern that a number of the partner appraisals reviewed still included references to non-audit fees, either in the objectives or the comments on performance, and the fact that ethics queries were sometimes sent via email rather than by using the dedicated ethics query system.
The FRC also queried the firm’s response to discovering in October 2012 that an individual had abused the process for changing and re-setting electronic passwords, within the audit software system. At the FRC’s request, GT had reviewed its audit system to check that inappropriate password resetting was not a systemic issue, but the regulator said it remained ‘concerned’ that no preventative controls have been considered.
In his response to the FRC findings Mark Cardiff, GT head of audit, said: ‘We are pleased to see recognition of the significant strengthening of our internal communications about audit quality and of the improvements to our training in relation to professional scepticism.
‘We have already implemented new or enhanced policies and procedures designed to address other recurring issues identified in the report and the impact of these developments is beginning to be evidenced in the findings of internal quality reviews.’
Crowe Clark Whitehill report
The FRC three-yearly review of Crowe Clark Whitehill looked at five audit engagements relating to two AIM quoted companies, two large pension schemes and one large charity, with financial year ends between 31March 2013 and 30 September 2013.
Of these, four were assessed as being performed to a good standard with limited improvements required, while one audit required improvements and no audits required significant improvements.
The previous 2008/09 inspection identified an audit requiring significant improvements, and FRC said that where similar matters arose on another audit in the current inspection, it found that they had been appropriately dealt with on this occasion.
On two audits, the FRC identified a need for some improvement in the level of professional scepticism and challenge of management. It also said the firm should pay particular attention to improving the audit of financial statement disclosures.
In one audit insufficient audit evidence was obtained for certain financial statement disclosures; in two audits the FRC identified certain disclosure inconsistencies, errors or omissions that had not been identified by the audit team; and in two audits fully referenced final financial statements were not included on the audit files.
The regulator also said Crowe Clark Whitehill should require audit quality objectives to be set for all audit partners and staff to further embed a quality culture, and emphasise the importance of identifying and assessing potential threats to the firm’s independence.
In response to the findings Steve Gale, head of professional standards, Crowe Clark Whitehill, said: ‘We are encouraged that the Audit Quality Review team noted both improvements in the firm’s policies and procedures since the last report and the positive and prompt manner in which we responded to their recommendations.’
The FRC’s AQI Annual Report for 2014/15 and, separately, individual reports on Deloitte, KPMG, EY, PwC and Mazars are due to be published by mid-June.
Details of the GT report are here: https://www.frc.org.uk/Our-Work/Publications/Audit-Quality-Review/Audit-Quality-Inspection-Report-February-2015-Gran.pdf
Details of the Crowe Clark Whitehill report are here: https://www.frc.org.uk/Our-Work/Publications/Audit-Quality-Review/Audit-Quality-Inspection-Report-Crowe-Clark-Whiteh.pdf