Home Business NewsBusiness Ineffective audits are costing businesses millions, regulator finds

Ineffective audits are costing businesses millions, regulator finds

by LLB Editor
9th Dec 20 11:28 am

The Financial Reporting Council published Audit Quality Review in which it stated that more than 80% of the audits the FRC reviewed over the past two years that were assessed as “improvements required” or “significant improvements required” identified ineffective challenge of management as a key driver of our overall assessment of that audit.

The regulator has concluded that new initiatives need to be introduced, including how to help audit firms encourage “a culture of . . . professional scepticism”. Further initiatives include helping firms identify “issues with challenge of management”; a new conference next year enabling regulators, and new ways for academics and sector experts to share good practice.

A lack of questioning of company managements by auditors has been identified as a failing in several high-profile collapses, including those of payments group Wirecard, government contractor Carillion and café chain Patisserie Valerie.

Chris Biggs, Partner at Theta Global Advisors, has commented on the report and what it could mean for the future of the auditing sector:

“There is a huge amount of heightened scrutiny on auditing services, especially of the Big Four, looking at the overall quality of the audit, the role auditors play in terms of legislation and their public perception, and the independence of auditing services. For example, how this is impacted as firms also deliver more lucrative non-auditing consulting services to their audit clients.

Clients should minimise the use of their auditors for non-audit consulting services as much as possible. This will reduce actual conflicts of interest, reduce perceived conflicts of interest and increase public confidence both into auditing firms and their clients.

If this doesn’t change, drastic measures may be taken by supervisors and Governments. We could see audits moving to be the responsibility of government-led bodies. Furthermore, public confidence will not improve and the image will decline.

This has led to a situation that could leave the market open to mid-tier and boutique firms challenging the Big Four for non-auditing services. Many companies are aware of this perceived lack of independence, thus may look beyond the Big Four’s offerings.”

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