The U.K.'s Financial Reporting Council published its annual inspection and supervision results Thursday of the largest audit firms — BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC — and said it found signs of continued improvement.
Overall, 77% of the audits inspected by the FRD were deemed to be good or required limited improvement. That marks a year-over-year improvement spanning four years, with a 10 percentage point increase compared to the 67% recorded in 2020.
Five of the largest firms had no audits that required significant improvements and the overall number of such audits has declined from 7% in 2021-2022 to 3% of audits inspected in 2023.
Despite those improvements, the FRC fined both PwC's and KPMG's U.K. firms and some of their former audit partners last week over audits of a client company called Eddie Stobart Logistics in 2017 and 2018.
The results for BDO and Mazars, meanwhile, continued to be below their peers, but are improving, according to the FRC.
BDO's audit inspections indicated that 69% of its audits were considered good or requiring only limited improvement, a notable increase from the previous year's 58%. Similarly, Mazars also saw an improvement, with 56% of their audits meeting the desired standards, up from 50% previously. However, the FRC said it's disappointed with the overall results and lack of progress in some areas, and there remains work to be done as they continue to fall below the standard of their peers.
The report also discussed how management and audit committees play an integral role in the audit ecosystem and sets out examples of steps that audit committees can take to drive responsive and high-quality audits.
The Canary Wharf business, shopping and financial district in London
Jason Alden/Bloomberg
"It is encouraging to see the ongoing and consistent improvement in audit quality at the largest audit firms," said FRC deputy chief executive Sarah Rapson in a statement. "It is also encouraging to see progress at both Mazars and BDO. It is, however, disappointing that there are still significant areas of their work that need to be addressed and the FRC will continue its increased level of supervision, requiring them to take further action to raise the quality of their audits in certain areas."
BDO responded to the inspection results in the report. "BDO supports the FRC's purpose of serving the public interest by setting high standards of corporate governance, reporting and audit and by holding to account those responsible for delivering them," the statement began. "The firm recognizes and embraces the FRC's objectives of setting high audit quality standards, assessing their effectiveness and promoting a more resilient U.K. audit market. Following last year's FRC Public Report the firm put in place a comprehensive improvement program in order to consistently deliver high-quality audits. The FRC and the firm acknowledge that it will take time for the results of this program to be fully seen."
Mazars' response was also included in its inspection report. "We acknowledge the FRC's inspection results, and we are disappointed with the number of audits requiring improvement," said the firm. "We are, however, encouraged that the actions we had taken in FY21 appear to have had a positive impact on our quality performance as presented in this FRC's Public Report dated July 2023, compared to the previous year, notably with no audit requiring significant improvements. We thank our teams for their hard work in addressing the quality findings identified."
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