There were an “unacceptable” number of local audits identified as requiring significant improvement in the latest inspection results from the Financial Reporting Council (FRC).
The regulator said that four inspections highlighted the need for significant improvement across three firms (BDO, Deloitte and Grant Thornton). Three of the inspections were of financial statement audits and one was a review of auditors’ work on value for money (VfM) arrangements.
Inspectors found that 70% of 2021/22 financial statement audits required no more than limited improvement – equivalent to the outcome the previous year. But 15% of the 2021/22 audits required improvement and a further 15% required significant improvement. In 2020/21, there were no audits or VfM arrangements that required significant improvement.
According to the FRC’s analysis, “inconsistency is preventing firms from eradicating poor quality audits” and they need to review their quality action plans.
“While it is encouraging that some improvements observed last year have been maintained, the number of audits requiring significant improvement is unacceptable and urgent action is needed by the firms to address any shortfalls in audit quality,” said Sarah Rapson, the FRC’s executive director of supervision.
The FRC inspected a total of 20 financial statement audits across six firms: six of the audits were for health bodies and 14 were local government bodies (11 councils, two pension funds and one other). A further 14 inspections were conducted on VfM arrangements at six health bodies and eight local government bodies (one pension authority, six councils and one other).
BDO was assessed as having one financial statement audit and one VfM arrangement that required significant improvement. Grant Thornton and Deloitte each had one financial statement audit that required significant improvement.
The three firms highlighted for criticism currently have 52% of the local government audit market (Grant Thornton on 40%, Deloitte on 6% and BDO on 6%). However, both BDO and Deloitte have confirmed recently that they will no longer undertake local government audits from 2023/24.
While it is encouraging that some improvements observed last year have been maintained, the number of audits requiring significant improvement is unacceptable and urgent action is needed by the firms to address any shortfalls in audit quality.
Reaction of audit firms under fire
Scott Knight, head of audit at BDO, said: “We’re disappointed with the findings relating to one major local audit. On determining the underlying issues, immediate action was taken and we’re continuing to action improvements, in line with our overall objective of delivering consistently high-quality audits.”
Fiona Baldwin, head of audit at Grant Thornton UK, said the firm was pleased that the FRC had acknowledged its investment in audit quality and recognised that there had been an overall improvement in its performance.
She added: “Whilst not all of our files reviewed achieved the highest standards, we will continue to strengthen our procedures and training to limit the risk of this recurring. We recognise the importance of continuous improvement and have taken prompt action to embed the learnings from file reviews.”
A Deloitte spokesperson said that audit quality remained the “number-one priority” of the firm. “We are therefore extremely disappointed that one of our audits fell short of the standards expected. We have since taken steps to identify and address the matters raised.
“We are committed to continuing to transform our technology, processes, governance and controls in order to ensure we consistently deliver the highest quality audits.”
The persistent timeliness issues with audited accounts remains a significant concern for the FRC as Systems Leader, and concerted action is needed from all parts of the system for local government financial reporting and audit to urgently improve matters.
Material errors
Findings identified on the financial statement audits included: material errors; insufficient justification to support the modification of an audit opinion; and unadjusted audit differences reported by the auditor being material. One VfM inspection found that changes had been made to an audit file provided to FRC inspectors after the FRC had notified the firm of its inspection.
The FRC also highlighted the issue of the timeliness of auditor reporting – with 91% of 2020/21 audits not completed by the target date of 30 September 2021.
“The persistent timeliness issues with audited accounts remains a significant concern for the FRC as Systems Leader, and concerted action is needed from all parts of the system for local government financial reporting and audit to urgently improve matters,” said Rapson.
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