UK Regulators Slam Big Four Audit Firms, Others

Michelle Remo, “Big 4″ observer
July 27, 2011 /

A damning report published by the Professional Oversight Board of the Financial Reporting Council has lambasted the big four audit firms, BDO, and Grant Thornton for several shortcomings in raising skepticisms against companies and in strengthening their independence.

The individual reports detailed specific areas in which the UK’s six leading audit firms need to make improvements following the heated debate on the audit firms’ market concentration. In March this year, the Office of Fair Trading in UK conducted an investigation into the lack of competition in the audit industry before and after the economic crisis in 2008.

Investigations by authorities focused on the restrictive bank clause widely used by the banking sector that left customers filing for loans with no other options but to tap the services of Big Four audit firms alone.

On Ernst & Young, the audit inspection unit (AIU) recommended that “audit teams need to demonstrate appropriate scepticism in assessing growth rates which appear to exceed historical trends and the impact of changes in the client’s market.”

Ernst & Young was also told to ensure that its “assessments of the reasonableness of the growth rates and other assumptions, source data and methodologies used by management in assessing the potential for impairment of goodwill and other assets are supported sufficiently with appropriate audit evidence.”

“We are pleased that the report recognises our emphasis on audit quality. The quality of audit has never been more important than in the current environment and we recognise that independent audit inspection by the AIU plays a key role in assuring audit quality in the UK,” Ernst & Young responded to the AIU.

In the same manner, POB told KPMG to “consider the need for further action to improve consistency of work performed on key judgement areas.”

Regulators urged the firm to “redress as a priority our recurring findings in relation to substantive analytical review where there are implications for the sufficiency of substantive testing and as a result the overall audit evidence obtained.”

KPMG admitted that its efforts toward analytical reviews have “not been sufficiently effective.”

The POB also urged the firm to ensure that it applies appropriate professional scepticism to information prepared by its staff “that is significant to material amounts included in the financial statements (such as provisions or recognised revenue) and test its reliability.”

“We have already taken action to address the specific matters raised. Whilst we may not always have exactly the same view as the AIU on the significance of individual matters, we share the objective of avoiding any ‘significant improvement required’ assessments in future,” LPMG LLP replied in a statement.

On ther other hand, the AIU recommended that PwC pay “more attention to its assessment of goodwill impairment, in particular the appropriateness of key assumptions and the adequacy of related disclosures.”
PwC was also told to enhance its “procedures to encourage further the exercise of professional scepticism and ensure that audit teams demonstrate this adequately in practice.”

The firm should also ensure that audit teams pay more attention to planning the audit of revenue in an effective manner; provide further guidance and training to audit teams regarding the use of internal experts; and monitor the effectiveness of actions taken to address recurring findings from one year to the next.”

“We recognise that quality is the foundation for the work PwC undertakes for our clients and of our reputation. We welcome your report summarising the matters noted during your inspection process. It is an important contribution to helping us drive our focus on continuous quality improvement,” Richard Sexton of PwC told AIU director Andrew Jones in a letter.

On the other hand, POB told Deloitte LLP to identify and evaluate “adequately the key aspects of management’s impairment reviews of goodwill and other intangible assets, including the exercise of appropriate professional scepticism in evaluating the identification of cash generating units, the reasonableness of key assumptions and the completeness and accuracy of related disclosures.”

The recommendations were based on the review of ten or more audit cases for each firm, which were analysed and rated by the AIU’s experts.


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