UK regulator tells auditors to justify ditching risky clients

Britain’s auditing watchdog warned accountants on Thursday that they risk breaching a recently introduced industry code if they shy away from checking the books of problematic companies, such as those deemed to have weak management controls.

The Financial Reporting Council (FRC) said its new audit firm governance code, which came into effect in January, states that auditors must take account of the public interest when they take on or decline work.

For accountants a key aspect of this public interest responsibility is that listed companies are required by law to have their accounts externally audited.

“We will be concerned in situations in which the firms that are the most competent and capable to undertake an audit either resign, do not re-tender, or decline an invitation to tender with no consideration of the public interest implications,” the FRC said in its annual health check of audit quality at seven firms.

Resigning from auditing a challenging company due to its weaknesses of management, a breakdown in relations, or where the company refuses to pay a fair price, would not necessarily be seen as an acceptable “de-risking” strategy, the FRC said.

“Firms must … have sought to address and resolve concerns through all available mechanisms prior to resigning,” it added.

The annual health check covered UK company audits by the world’s “big four” – KPMG, PwC, Deloitte and EY, and in the next tier down, BDO, Grant Thornton and Mazars.

Overall, 77 of 100 audits inspected for financial year 2022/2023 were “good” or required only limited improvement, reflecting a 10% increase compared with 67% in 2020.

Among the big four, 74% of KPMG audits inspected required no more than limited improvements, down from 84% last year, with one audit requiring significant improvements, the FRC said.

Meanwhile, BDO and Mazars continued to lag the pack, with “unacceptable” recurring findings at BDO in particular, the FRC said.

“It is, however, disappointing that there are still significant areas of their (BDO and Mazars) 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,” Sarah Rapson, FRC deputy chief executive, said in a statement.

Mazars said it was disappointed with the results, but was committed to delivering the highest quality standards.

BDO also said it was disappointed there were recurring findings, but it was not complacent and that investments in improvements would take time to embed.