FRC fines BDO £200,000 over insurance audit failings

BDO has been fined £200,000 and sanctioned by the Financial Reporting Council (FRC) for lapses in its auditing of insurer AmTrust Europe Ltd (AEL), which included failing to report its evaluation of independent experts’ assessments

The FRC investigated BDO and partner David Roberts under the audit enforcement procedure (AEP), in relation to the statutory audit of AEL’s financial statements for the two financial years ended 31 December 2014 and 31 December 2015.

AEL is an insurance company with multiple lines of business across Europe, Asia-Pacific and Canada.  The regulator said the breaches of relevant requirements related to an area of audit work which was fundamental for the audits, namely the approach of AEL’s management to setting its technical provision for outstanding claims. 

For the FY2014 audit, a single breach was determined, concerning a failure in documentation of the relevant audit work.

A significant matter arising during the audit was AEL’s compliance with the Association of British Insurers’ Statement of Recommended Practice on Accounting for Insurance Business (ABI SORP). The evidence documented on the audit file did not record how the auditor had considered whether (in light of the auditor’s expert’s comments) the ABI SORP had been complied with and how the auditor had reached a conclusion on that matter.

In consequence, BDO and Roberts breached paragraph 8 of ISA 230, by failing to prepare adequate audit documentation recording a significant matter arising during the audit, the conclusion reached thereon, and significant professional judgment made in reaching that conclusion, relating to management’s compliance with the ABI SORP in respect of the gross technical provision for outstanding claims in the FY2014 financial statements of AEL.

 In respect of the FY2015 audit, there were breaches in three areas of audit work on provision for claims. These were the use of independent actuaries as auditor’s experts, the testing of management’s accounting estimate and the data on which it was based and the evaluation of the method of measurement used by management.

As a result of its findings, the FRC has imposed a financial sanction of £200,000 against BDO, discounted for admissions and early disposal to £160,000, and a reprimand.

The firm is required implement an appropriate training programme designed to improve quality and consistency in the firm’s processes for obtaining and evaluating independent actuarial audit evidence and in the documentation of those processes and of auditors’ key judgements.

Over a period of two years from the decision date, BDO is also required to undertake a quality performance review of the work relating to obtaining and evaluating actuarial audit evidence from independent actuaries as auditor’s experts and report the results annually to the FRC.

Roberts has been given a reprimand.

The FRC said its decision notice does not question the truth or fairness of AEL’s financial statements for the two years in question, and noted that the breaches of relevant requirements were not intentional, dishonest, deliberate or reckless.

The level of sanctions reflected that, among other things, the fact that BDO had already adopted a number of appropriate measures designed to address the shortcomings evident in the audit work in question, following a report by the FRC’s Audit Quality Review team on the FY2015 audit of the company. In addition, BDO and Roberts have a good compliance history and disciplinary record with no prior sanctions under the AEP or accountancy scheme.

Jamie Symington, deputy executive counsel to the FRC, said: ‘The failings in this case related to an area of high audit risk, namely the consideration of an insurance company’s approach to its provision for claims.

‘The auditors relied on the opinions of independent expert actuaries without taking sufficient steps to gain an understanding of or to evaluate their work.’

A spokesperson for BDO said: 'This is BDO’s first ever sanction from the FRC and we are extremely disappointed that our audit work for AmTrust Europe Limited in the financial years ended 31 December 2014 and 2015 did not meet required standards.

'This arose from an audit quality review which brought into question our assessment of the work of an actuary. To deal with this we then implemented measures to address the shortcomings identified, and our procedures in this area were strengthened still further following our merger with Moore Stephens and its in-house actuarial team.

'We have always taken audit quality very seriously, acknowledge the findings of the FRC in this matter and more generally coming out of the AQR process, and will continue to strive to do better.'

Final decision notice

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