BDO and Forvis Mazars were warned they could be banned from signing the accounts of their largest clients if their quality of audit work doesn’t improve.
The Financial Reporting Council has once again scolded the two accounting firms that are respectively the fifth and six largest auditors in Britain for their work during the last year. This regulator found the work to be “significantly under [its] expectations”.
In the last 12 months the FRC has inspected 13 BDO audits. Only a third of them were deemed up to standard, while in 2023, two thirds passed the regulator’s standards.
Mazars audits were examined by the watchdog and only 44% met their standards. This is down from 56% last year.
Sarah Rapson’s, FRC’s executive Director of Supervision, stated that both firms had invested heavily in improving audit quality for a number of years. It is therefore disappointing that they have seen a decline in their scores this year.
The FRC plans to give BDO and Mazars a “more intensive” supervision over the next year. If it doesn’t see any improvement, it will “take stronger action”, which could include using its powers in order to prevent the two firms from performing audits of so-called “public interest entities”. The FRC will give BDO and Mazars “more intensive supervision” over the coming year. If it does not see any improvement by next summer, then it may take stronger action. This could include using its powers to stop the two firms from auditing so-called public interest entities.
Rapson stated that it would be a “nuclear option” to ban them from the market, but they reserve the right to do so. She suggested that rather than a blanket prohibition, BDO or Mazars might have to request permission from the FRC to accept new clients, if their quality of work doesn’t improve.
Paul Eagland said, “We’re deeply disappointed in our grades this past year.” We remain confident in our people’s expertise and commitment, but it is clear that more work is needed to achieve grades that are in line with FRC requirements and our own internal standards.
According to him, “comprehensive plans and actions” are being implemented in response to the FRC’s concerns.
Forvis Mazars spokeswoman said: “We’re disappointed with the results of this year and acknowledge that we haven’t consistently met the desired level of audit quality.” We will continue investing in and focusing on applying the highest quality standards to our work in order to play a full role in the UK audit market for public interest entities.
The FRC released its annual inspection results along with the warning shot for the two challengers. The regulator inspects completed audits every year to determine if they were carried out correctly.
Results are important to the industry, not only because they’re one of few indicators of their performance, but also because they determine a portion auditors’ bonuses.
In the last 12 months, the watchdog evaluated 92 audits. Of these, 74% were deemed to be good or only require limited improvements. This score was slightly lower than the 76 percent that the firms scored collectively in the year 2023. However, the FRC stated they were “part of an improvement trend over the past five years”. The FRC said that only 4% of audits needed “significant improvements”, which is about the same percentage as last year.
The regulator praised the Big Four while BDO and Mazars were heavily criticized. Over 80 percent of the audits they inspected met FRC standards.
Deloitte had the best performance, with 94% of audits checked by regulators requiring little or no change. EY and PwC both scored 76 percent, a slight drop from the 80 and 82 percent they got last time.
FRC said that 89 percent of KPMG audits were up to par, up from just 59 percent in 2021 and 74 percent in 2023. Rapson cited KPMG as the “best” example for BDO and Mazars. The audit division of KPMG had turned around after a series of sub-par audits including Carillion, now collapsed construction contractor.
She continued: “One swallow does not make a summer, and all that. But we’ve stopped referring to KPMG as the laggard [among the Tier One] firms.”
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