Epic fail! One in four UK company audits can’t be trusted – The Wall Street Journal

With the plethora of financial scandals involving accounting irregularities at closely scrutinised companies, it is a wonder that the world's auditors are still in business. Let's take recent examples: In the UK, auditing shortcomings by KPMG led to the collapse of construction giant Carillion. In South Africa, multinationals Steinhoff and Tongaat-Hulett, both audited by Deloitte, have been in the spotlight after their share prices collapsed as the dirt spilled out into the open. But KPMG, also implicated in the industrial-scale South African state capture scandal, and Deloitte are not alone in their sins. The UK's Financial Reporting Council has put Grant Thornton into special measures, saying it has been the worst performer of 11 firms assessed. However, with a quarter of all audits not worth the paper they are printed on, investors have to ask what value accountants add in the world of publicly listed investments. It's looking increasingly like the audit requirements are no longer fit for purpose. – Jackie Cameron ___STEADY_PAYWALL___.UK audits continue to miss quality targets set by regulatorBy Nina Trentmann(The Wall Street Journal) – Financial statement audits of large British companies continue to miss regulatory standards, according to the UK's Financial Reporting Council. The finding comes as the country's audit sector braces for a potential shake-up amid concerns around the quality of such assessments..The British watchdog for audit and accounting said 75% of audits of large UK companies conducted in 2018 were good or required no more than limited improvements. That is better than the 73% of audits that met the standard in 2017, but still significantly below the FRC's target of 90% of audits to meet the quality standard.None of the seven firms reviewed in the report, including the Big Four – Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP – met the FRC's audit quality target. The regulator examined 260 audits of 2017 financial statements of FTSE350 stock-index companies as part of its annual audit-inspections work.The results highlight ongoing concerns around the performance of the UK's largest audit firms, which have been under increased scrutiny in recent months following a number of high-profile corporate collapses.Read also: WORLDVIEW: With auditors & other watchdogs, trust but verifyRegulators and lawmakers have made various suggestions to overhaul the industry. These include a call to enforce an operational split between audit and non-audit work to limit conflicts of interest. Meanwhile, the FRC has stepped up its enforcement efforts."The FRC found cases in all seven firms where auditors had failed to challenge management sufficiently on judgmental issues," said Stephen Haddrill, the chief executive of the FRC."At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable," Mr. Haddrill said.The Institute of Chartered Accountants in England and Wales, an accounting industry body, said the results underline the need for urgent action on audit reform."As a profession, chartered accountants acknowledge that we face a watershed moment," said ICAEW Chief Operating Officer Vernon Soare.The audit firms mentioned in the report have agreed to make specific changes to enhance the performance of their audit practices.PwC in June said it would split its UK audit assurance and consulting practice into two distinct businesses and spend an additional £30m ($37.4m) a year to improve its audit business, in part by hiring additional auditors.The quality of the PwC's audits declined in 2018, with 65% of audits considered good or in need of only minor improvements, compared with 84% in 2017. "We are disappointed with the results of the latest AQR [Audit Quality Review] inspection and regard the issues raised in this cycle to fall below the high standards we aim to achieve on all our audits," the firm said.Read also: Blinded by self-regulation, SA auditors in clean-up farce – William Saunderson-MeyerKPMG, another professional services that recently announced changes to its audit business, saw its quality rate increase to 76% from 61% in the prior year, but will remain under increased scrutiny, the FRC said. "This will continue until KPMG demonstrated a sustained improvement in audit quality," the FRC said.KPMG in May said it would increase the oversight of its UK audit arm.Deloitte's performance improved, with 84% of audits of 2017 financial statements considered as good, up from 76% during the prior year. "We are pleased our overall quality record has improved; we continue to transform our audit by investing in our firm wide processes and controls, which we also seek to develop globally," said Stephen Griggs, Deloitte's managing partner for audit and assurance and deputy CEO.The UK government is expected later this year to respond to recommendations made by regulators and lawmakers to overhaul the audit sector. Some of these proposals include forcing professional services firms to structurally split their businesses.But the effectiveness of such changes remains to be seen, said Fiona Czerniawska, director at Source Global Research, a company analysing the management consulting industry. "Given how little effect audit regulation has had on the quality of audit, it is difficult to see that this leap in the dark would have an effect," Ms. Czerniawska said.As part of the overhaul of the UK audit sector, the FRC will become part of a newly established regulator called the Audit, Reporting and Governance Authority.Write to Nina Trentmann at Nina.Trentmann@wsj.com

Epic fail! One in four UK company audits can’t be trusted – The Wall Street Journal

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