Over a third of audits still failing the quality test

The number of deficient audits performed by the six largest global audit firm networks reduced by 3% in 2018, although the current level – at 37% – is still unacceptable

The statistics, revealed by the International Forum of Independent Audit Regulators (IFIAR) in its seventh annual survey of inspection findings by its member regulators’ individual audit firm inspections, show that audit quality is slowly improving.

Five years ago the number of audits found to have significant deficiencies stood at 47%. By 2017, this had reduced to 40% and is now at 37%. However, as IFIAR points out, “While the downward trend is encouraging, the recurrence and level of findings reflected in the survey indicate a lack of consistency in the execution of high quality audits and the need for a sustained focus on continuing improvement”.

IFIAR also stresses that the survey results should be read with caution as they do not measure precisely firms’ progress in improving audit quality. A comprehensive evaluation of audit quality, it says, would take account of various factors and not just numerical information about deficiencies identified and reported over the course of an inspection.

With this in mind, it has included data from its members on initiatives that they have pursued individually that are designed to help improve audit quality. These range from publications aimed at auditors, investors and audit committees to workshops and roundtables with stakeholders.

The survey also reveals that the issue firms slip up on most often relates to accounting estimates, including fair value measurement. In 2018, 28% of deficient audits had failed in this area. The next most problematic areas are internal control testing (15%) and adequacy of financial statement presentation and disclosure (13%).

The survey was based on responses from 45 of IFIAR’s 55 member regulators covering data on key results from their inspections of audit firms’ systems of quality control and audits of public listed companies.

Deficiencies in the audits in question are defined as serious enough to indicate that the audit firm did not obtain sufficient appropriate audit evidence to support its opinion. Their existence, however, does not necessarily imply that the financial statements are materially misstated.

The six global audit firm networks are BDO International, Deloitte Touche Tohmatsu, Ernst & Young Global, Grant Thornton International, KPMG International Cooperative and PricewaterhouseCoopers  International.

Last October, IFIAR’s UK member, the Financial Reporting Council disclosed that 27% of the audits it inspected in 2018 needed more than limited improvements, an increase from 19% the previous year. It laid the blame largely on “an unacceptable deterioration in quality at one firm, KPMG”, although it had found shortcomings in audits by all the firms it reviewed.