The Financial Reporting Council (FRC) has published its Annual Review of Audit Quality, highlighting troubling performance from audit firms BDO and Mazars.
Despite an overall trend of improvement among the Big Four firms – Deloitte, EY, KPMG, and PwC – BDO and Mazars have shown significant declines.
The audit quality ratings for BDO plummeted from 69 per cent to a worrying 38 per cent, while Mazars dropped from 56 per cent to 44 per cent. These declines stand in sharp contrast to their competitors, underscoring a widening gap in audit quality between the Big Four and the other Tier 1 firms.
The regulator published separate reports on each of these six firms, and for both BDO and Mazars, it stated that the firms “must significantly improve its audit quality”.
For BDO, two of the 13 audits the FRC inspected (15 per cent) were found to require significant improvements. The regulator noted that it has highlighted over the years recurring findings related to the challenge and testing of estimates and assumptions, the audit of revenue, and quality control procedures.
But for this year, it identified key findings in other areas including the audit of inventory, and impairment of goodwill and intangibles.
The regulator warned that BDO “must urgently re-assess its recurring findings to understand why its previous quality actions have not had the impact on audit quality expected.”
While for Mazars, the regulator found that one of the nine audits it inspected (11 per cent) was found to require significant improvements.
The FRC suggested that over the last two years, there have been recurring findings relating to the evaluation and challenge in the audit of estimates and judgements, the audit of revenue and quality control procedures.
It stated that it is essential that Mazars uses its root cause analysis to understand whether previous actions should have had more of an impact.
Both BDO and Mazars were told to focus on the composition and mindset of its audit teams and ensure they are supported by effective training and tools, adding that improving audit quality takes time.
However, FRC added that it may take stronger action, which could include using its Public Interest Entity (PIE) Auditor Registration powers, if its do not see improvements from the firms in 2025.
BDO’s response in the report stated that “the firm is deeply disappointed that our AQR results, having improved last year, have deteriorated, and that they contain recurring findings. We recognise that we must make significant progress, particularly in the areas of recurring findings.”
While Phil Verity, UK CEO of Mazard response was: “We are encouraged by the FRC’s acknowledgement that transforming audit quality takes time and grateful for their support to help us succeed in the public interest.”
He noted that “over the last year, we have dedicated significant focus to developing an Audit Quality Transformation Plan (AQTP) which was introduced in October 2023. Whilst the audits inspected in this AQR cycle did not benefit from our AQTP, we anticipate next year’s results will reflect this investment.”
Elsewhere, Deloitte increased its inspection figure from 82 per cent to 94 per cent, KPMG was also up from 74 per cent to 89 per cent. While EY dropped slightly from 80 per cent to 76 per cent and PwC dropped 82 per cent to 76 per cent.
As a whole, the report noted that audit quality for the FTSE 350 has also improved, up from 81 per cent to 87 per cent year on year, and the FRC said it is pleased that audit quality in the UK for the largest listed businesses compares favourably internationally.
Commenting on the results, FRC’s executive director of supervision, Sarah Rapson, said “the FRC welcomes the audit quality improvement at the largest four audit firms, particularly the improvement in FTSE 350 audits, which are some of the most complex and systematically important UK audits.”
“Disappointingly, BDO and Mazars’ performance has fallen significantly below our expectations. Both firms are strategically important to the UK audit market and the wider UK economy, so it is vital that they deliver on their agreed improvement plans,” she stated.
She added that”the FRC’s supervisory work with these two firms will continue to focus on these improvements.”