LONDON: All of Britain's leading accounting firms have failed to hit quality targets set by their regulator for auditing company books for the second year in a row, with Grant Thornton and PwC singled out to join KPMG under tougher supervision.
The damning review from the Financial Reporting Council (FRC) will pile pressure on the government to implement a proposed sector shake-up prompted by corporate failures at builder Carillion, retailer BHS and an accounting scandal at cafe chain Patisserie Valerie.
The FRC said EY, KPMG, Deloitte and PwC, known as the Big Four, and BDO, Grant Thornton and Mazars from the next tier down, all failed to hit a target that 90 per cent of audits reviewed by the regulator were good or required only limited improvements.
Only 75 per cent of the sample of audits from among Britain's 350 top listed companies for the year ending December 2017 met the 90 per cent target overall as accountants failed to challenge information clients gave to them, the FRC said.
There was no overall improvement on last year's findings when all audits reviewed failed to meet the 90 per cent target.
"At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable," said Stephen Haddrill, the FRC's chief executive.
Radical reform of the sector was proposed last December to rebuild public trust in audit, including replacing the FRC, described by lawmakers as toothless, with a more powerful watchdog.
Haddrill and his chair Win Bischoff are being replaced.
The bulk of the top 350 listed firms would have two auditors in a bid to improve audit quality, but this depends on Grant Thornton, BDO and Mazars winning the confidence of blue chip companies.
The timing of reform is unclear given it needs legislation to implement and parliament is focused on Britain's protracted departure from the European Union.
The ICAEW, a professional accounting body, said audit faces a "watershed moment" and the government should implement reform without delay.
The new watchdog should apply "fresh thinking" to improving audit quality and not be constrained by targets and methods bequeathed to it by the FRC, the ICAEW said.
British Business Minister Greg Clark told a parliamentary committee last month there would be a public consultation on a "proportionate package of reforms" to improve audit quality and maintain Britain's global status as a center of audit expertise.
FAILING TO CHALLENGE
The FRC said it found cases in all seven firms where auditors failed to challenge management sufficiently, a "recurring finding" for several years.
The watchdog said it would raise its target to 100 per cent from 90 per cent for reviews of audits starting from June 2019 financial statement year-ends as having any below standard audits was unacceptable.
Only half of Grant Thornton's sample audits were assessed as good, down from 75 per cent in 2018, the FRC said. More than a quarter of its audits reviewed in the past five years needed significant improvement.
"The FRC has therefore increased its scrutiny of Grant Thornton," the watchdog said. It will review a larger number of the firm's audits in the coming year.
Both Grant Thornton, which audited Patisserie Valerie, and PwC, auditor of BHS, had already announced steps to bolster audit activities in anticipation of the FRC findings.
Grant Thornton said the FRC report showed that the entire profession must improve the quality of its work and that Grant Thornton is no exception.
The deterioration from 84 per cent to 65 per cent in PwC's results was also "unsatisfactory" and the FRC will "scrutinise closely" how PwC implements its improvement plan.
"While results at KPMG have improved, the firm remains subject to increased FRC scrutiny," the watchdog said. This will continue until KPMG, which audited Carillion, has demonstrated a sustained improvement in audit quality.
The FRC said 84 per cent of Deloitte's audits met the required standard, up from 76 per cent last year, with EY at 78 per cent, up from 67 per cent in 2018.
But 40 per cent of Mazars' reviewed audits failed to meet the target, worse than in 2018, while 12.5 per cent of BDO's sample audits were below the acceptable standard, unchanged from last year.