The United Kingdom‘s accounting watchdog plans to publish its grades for audit inspections after company failures at builder Carillion and retailer BHS prompted lawmaker calls for a crackdown.
The Financial Reporting Council (FRC) said in its Developments in Audit Report for 2019 that the quality of audits at the seven biggest accountancy firms was still not consistently reaching the necessary high standards expected.
Accountants struggle to sufficiently challenge what clients tell them, the FRC said, noting that this is particularly a problem when it comes to writing down goodwill, an aspect seized on by British lawmakers 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 would pilot publication of summaries and grades from its annual inspections of sample audits of top-listed firms in the UK.
The pilot would apply to audits from March 2020 onward. It would name the accounting firm and the customer being audited, but would only go ahead if both parties gave 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 recommended replacing the FRC with a more powerful body – proposed to be called the 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 partly due to there being a general election next month. Foreseeable delays in the change in the law are prompting the FRC’s need for consent.
Publishing specific grades could be embarrassing for EY, Deloitte, KPMG, and PwC, collectively known as the “big four” firms that dominate auditing. It could also cause embarrassment for Grant Thornton, BDO and Mazars in the next tier down.
KPMG, which audited Carillion, said it would give consent.
Deloitte said it was supportive of greater transparency and is evaluating the proposal with the FRC. PwC, EY, BDO, Mazars and Grant Thornton had no immediate comment.
The FRC’s latest inspection reports in July showed that all seven firms failed to reach the target that at least 90 percent of audits inspected should be “good” or requiring only limited improvements.
The FRC has raised its target to 100 percent from this year, making it more likely that some accountants will continue to fall short.