Monday, 12 March 2018

Accounting watchdogs find ‘serious problems’ at 40% of audits

Madison Marriage in The Financial Times


Global accounting watchdogs identified serious problems at 40 per cent of the audits they inspected last year, raising fresh concerns about the quality of work being carried out by the world’s largest accounting firms. 

According to the International Forum of Independent Audit Regulators, accounting lapses were identified at two-fifths of the 918 audits of listed public interest entities they inspected last year. 

The audit inspections focused on organisations in riskier or complex situations such as mergers or acquisitions, according to the IFIAR, whose members include 52 audit regulators around the world. 

The most common issue identified by these regulators was a failure among auditors to “assess the reasonableness of assumptions”. 

The second biggest problem was a failure among auditors to “sufficiently test the accuracy and completeness of data or reports produced by management”. 

The findings have intensified concerns about weaknesses in the auditing process, an issue that has been thrust into the spotlight over the past 12 months following a string of high profile accounting failures. 

These include the collapse of BHS and Carillion in the UK, a corruption scandal involving oil company Petrobras in Brazil, and the share price collapse of South Africa’s Steinhoff after the retail conglomerate admitted to a series of accounting irregularities last year. 

Prem Sikka, an accounting expert and emeritus professor at Essex University, said the frequency of problems identified by the IFIAR was “terrible”. 

“There are a whole range of issues and there is no simple fix. There is a huge knowledge failure in the audit industry which is not being looked at. The whole industry is ripe for reform. The question is where is the political will for this?” 

The accounting industry has faced significant reputational problems in the UK in particular. KPMG came under heavy criticism from politicians last year for giving HBOS a clean bill of health shortly before the UK bank collapsed during the financial crisis. KPMG has also been criticised for declaring Carillion a going concern last March, 10 months before the construction company went into liquidation. 

The report showed that 41 per cent of the problems identified by audit regulators last year related to independence and ethics. These included accounting firms failing to maintain their independence due to financial relationships with clients, and failing to evaluate the extent of non-audit and audit services provided to clients. 

Many firms also failed “to implement a reliable system for tracking business relationships, audit firm financial interests, and corporate family trees”, the IFIAR said. Its research was based on feedback from 33 audit regulators who inspected the work done by 120 audit firms. 

Karthik Ramanna, a professor at Oxford university’s Blavatnik School of Government, said the number of firms with issues around independence and ethics was “absurdly high”. He added that the research would reinforce concerns about a lack of competition in the audit market, which is widely viewed as being dominated by the ‘Big Four’: EY, Deloitte, KPMG and PwC. 

“The auditing industry is so concentrated, once the largest firms set the standard for poor conduct, the whole industry is dragged down,” he said. 

Brian Hunt, chairman of the IFIAR, told the FT: “We would like the firms to focus on getting better. We need them to think about how they come at this a bit differently. The firms are making progress — we would like to see it happen a bit faster.” 

Deloitte said: “We remain focused on continually improving the quality of services we provide to our clients. We look forward to continuing our constructive engagement with our audit regulators.”

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