The U.K.’s accounting watchdog is challenging the Big 4 to improve audits after releasing evaluations that showed more than 60% of audits at PwC and KPMG were dismissed as unsatisfactory, Bloomberg reported.
The Financial Reporting Council’s latest annual review is based on a sample of audits. FRC determined that 65% of PwC’s audits were unsatisfactory. KPMG’s percentage was 61%. Deloitte scored the highest, with 24% needing improvements, and EY’s evaluation showed 29%, according to Bloomberg.
“We are concerned that firms are still not consistently achieving the necessary level of audit quality,” David Rule, the FRC’s executive director of supervision, said in a statement. “The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.”
The reports were released a week after FRC decided the Big 4 must split their audit units from their advisory arms due to conflict of interest concerns.
Richard Murphy, an accountant and economics professor at City University in London told Bloomberg, “It’s an outright failure of the audit profession and regulators. There has been a rapid decline in auditing standards which will increase costs for investors relying on the accounts for information and lead to more company failures at a time when society can least afford it.”
Auditors are under the microscope since the collapse of U.K.-based Carillion, Thomas Cook, Patisserie Valerie and German payments provider Wirecard.
The FRC said it was dissatisfied with the Big 4’s record of standing up to the management of their clients. “Firms’ senior management need to be clear that taking difficult decisions is an appropriate response to improving audit quality, even if it might sometimes mean delaying or modifying opinions, and ultimately losing some audit engagements,” the FRC said, The Financial Times reported.
The FRC has placed KPMG under special scrutiny because of its poor performance in previous evaluations, and it plans to evaluate a larger number of PwC audits after this year’s test results.
Additionally, the FRC studied some of the Big 4 audits of the listed Financial Times Stock Exchange (FTSE) 350. Deloitte came out on top with 90% of its FTSE audits rated good. EY scored 78%, PwC 67% and KPMG 58%.