A third of audits still falling short, FRC’s annual quality inspection finds

The Financial Reporting Council (FRC) has released the results of its 2020-21 audit quality inspection, finding that 29 per cent of the audits it examined required improvement.

The annual report reviews the practices of the seven largest audit firms: BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC, with 103 audits reviewed from the past financial year.

The results of this year’s report were only slightly better than in 2019-20, when 33 per cent of audits were found to require moderate or significant improvement. 

KPMG’s banking audits in particular raised red flags. This is the third year running FRC found the firm’s standards lacking, and it warned that the organisation would be closely monitored over the course of the year.

In general, quality across the individual firms was more mixed than in 2019-20 and the FRC has published measures that individual firms will be required to implement in response to the findings.

“While these results show some improvement on last year’s results, this improvement is marginal and significant change still needs to happen to meaningfully improve audit quality,” Sir Jon Thompson, FRC CEO, said.

“High quality audit is essential to maintaining trust and confidence in the UK’s financial markets. If the UK is to retain its position as a world leading professional services marketplace, and a global financial centre, outstanding audit quality and rigorous professionalism is at the heart of this.”

FRC adjusted some of its policies and operations this year, following the release of the Kingman review in 2019, which recommended the replacement of the regulator with a new body with stronger powers and a different approach. 

Sir Jon reported that FRC responded to the Kingman review’s findings by initiating operational separation of the big four firms, introducing enhanced audit standards in relation to ethics and fraud, building on its supervisory oversight, and strengthening its enforcement capability. 

But in addressing potential questions about why audit standards had been slow to improve, he noted that “elements of these actions remain voluntary on the part of audit firms”.

“This is why the BEIS White Paper ‘Restoring trust in audit and corporate governance’ is so important,” Sir Jon said. 

“Legislation will ensure that a new regulator, ARGA, with increased remit and powers can be created to promote improved audit quality as the key output of audit firm work, in the public interest.” 

ARGA, the Audit, Reporting and Governance Authority, is a new regulator that is expected to be in place by 2023.