Who audits the auditors?

It’s a great life being an auditor. You visit your clients and can ask as many questions as you like.

After all, your job is to confirm the accounts are showing a “true and fair view” or to be more precise, your job according to “International Standard on Auditing (ISA) 700, Forming an Opinion and Reporting on Financial Statements”, is to “form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.”

So, that’s the job of the auditors.

Who checks the quality of the audits though?

In the UK, the Financial Reporting Council (FRC) undertakes annual quality inspections of the largest auditing firms in the UK including Deloitte, EY, KPMG, pwc and a number of mid tier firms.

The latest annual report has been released and whilst there has been an improvement in the performance compared to previous years with 67% of all audits inspected in 2014/15 being assessed as either good or only requiring limited improvements, 33% of the audits inspected fell below the highest standards set by the accounting regulator and were classified as either requiring improvements or significant improvements.

Let’s just pause there for a moment.

What this is saying is that one in every three audits undertaken by the leading accounting companies in the UK have been classified as needing improvements or even worse, needing significant improvements.

Three of the more common issues identified in the report were:

  • Insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgement such as impairment testing and property valuations.
  • Insufficient or inappropriate procedures being performed. This is common to many areas including revenue recognition.
  • The failure to adequately identify the threats and related safeguards to auditor independence and to appropriately communicate these to audit committees.

The FRC do however appear to be trying to improve things and have introduced various initiatives.

For example, they now “require firms to develop action plans to address the weaknesses identified in individual audit engagements and firm-wide procedures”. In conjunction with the development of these action plans they now require firms to undertake a detailed rootcause analysis of the factors contributing to the issues arising from the inspections and those action plans together with the related analyses will then be subject to follow-up inspections.

A copy of the report can be found here.

The FRC also prepared individual reports for the Big 4 and they can be found on the following links:

Deloitte

EY

KPMG

pwc

You're not an auditor, you're a financial detective...

I’m an accountant and I’m proud of it. I think the education and knowledge that you acquire both during your studies and continuing professional education[..]

How many deficiencies did KPMG and pwc have?

The Public Company Accounting Oversight Board (PCAOB) is the main “watchdog” of the US auditing profession. As part of their quality review procedures they look[..]

Should Ernst & Young have done this?

I think truth and honesty in business are vital. I can therefore say in all truthfulness and honesty that I think Ernst & Young is[..]

You are (probably) a liar...

Here’s a nice ethical question for you – have you lied recently? My guess is that you have. Now before you get all righteous about[..]

Don't worry, he's ok...

A few years ago if a company wanted to advertise their products they mainly used the traditional media methods of TV, radio and print. Nowadays[..]

There's a 90% chance...

There’s been a significant reduction in the use of cash during the pandemic. A lot of shops now only accept card payments so that they[..]

Start walking...

Do you sit at a desk when you’re at work? If you do, how long do you spend sat there before you get up to[..]

I never emailed you...

Sometimes it’s the simple scams that can cause the most damage. We hear all the time about ignoring scam phishing emails where fraudsters are pretending[..]

Does this help you concentrate?

The Journal of Consumer Research published the results of five experiments into how the level of background noise can impact on performance when someone is[..]