UK financial watchdog set to publish audit quality grades

London — Britain’s accounting watchdog plans to publish its grades for audit inspections after company failures at builder Carillion and retailer BHS prompted law maker calls for a crackdown.

The UK Financial Reporting Council (FRC) said in its “Developments in Audit Report” for 2019 that the quality of audits at the seven biggest accountancy firms is still not consistently reaching the necessary high standards expected.

Accountants “struggle” to sufficiently challenge what clients tell them, particularly when it comes to writing down goodwill, an aspect seized on by British law makers in recent weeks after the collapse in September of travel firm Thomas Cook.

Year-on-year familiarity with clients can lead to accountants taking the same approach even when business conditions change, the FRC said.

“At a time when the whole audit market faces reform, we expect audit firms to make audit quality their number-one priority and to have effective programmes of work to deliver consistently high standards,” said David Rule, the FRC’s executive director of supervision.

The FRC said it will pilot publication of summaries and grades from its annual inspections of sample audits of top listed firms in Britain. The pilot will apply to audits from March 2020 and name the accounting firm and customer being audited — but only go ahead if both parties give their consent, the FRC said.

The FRC’s current annual inspection reports only give overall assessments for each accountant, with no specific grades for a named company’s audit.

A government review last year by John Kingman recommended replacing the FRC with a more powerful audit, reporting and governance authority that should eventually publish the annual audit inspection reports in full, including gradings.

A change in the law to implement this is not expected until at least early 2020, partly due to Brexit consuming parliamentary time and a general election next month, hence the FRC’s need for consent.

Publishing specific grades could be embarrassing for EY, Deloitte, KPMG and PwC, collectively known as the Big Four, that dominate auditing, as well as for Grant Thornton, BDO and Mazars in the next tier down. The FRC’s latest inspection reports in July showed that all seven failed to reach the target that at least 90% of audits inspected should be “good” or requiring only limited improvements.

The FRC raised its target to 100% from 2019, making it more likely that some accountants will continue to fall short.

Reuters