The U.K.’s accounting regulator said audits performed by the big four accounting firms and smaller rivals failed to meet expectations, raising troubling questions about the financial statements upon which investors rely.
The Financial Reporting Council, which oversees the U.K. arms of international auditing firms, said that the performance of Deloitte LLP, Ernst & Young LLP, Grant Thornton UK LLP and PricewaterhouseCoopers LLP had improved from the year before but still fell below expectations, with about 80% of audits assessed as good or requiring only limited improvements.
“The number of audits that we have assessed as requiring improvements remains unacceptably high,” the Financial Reporting Council said. Each year, the regulator inspects a sample of individual audits to assess their quality. It focuses on what it calls higher-risk audits, such as companies in financial difficulty or where the auditor has identified governance weaknesses.
The Financial Reporting Council said KPMG LLP’s performance was unacceptable. Of KPMG’s audits, only 59% were graded as good or requiring only limited improvements.
“Overall inspection results at KPMG did not improve and it is unacceptable that, for the third year running, we found that improvements were required to KPMG’s audits of banks,” the Financial Reporting Council said Friday in a report on inspections carried out during the 12 months to the end of March.
KPMG’s banking clients include
Barclays
PLC.
A wave of financial scandals in recent years has increased concern about the quality of audits in the U.K. The Financial Reporting Council last month started investigating the audits of Greensill Capital, a firm that specialized in supply-chain finance before collapsing earlier this year. It is also investigating the audits of Wyelands Bank PLC, which is owned by one of Greensill Capital’s top clients.
KPMG has been repeatedly criticized by the U.K. regulator. In 2019, KPMG was fined £5 million, the equivalent of $6.87 million, and reprimanded for its failings in connection with the audit of financial statements of Co-operative Bank PLC. The penalty was reduced to £4 million because KPMG agreed to settle.
“We are committed to delivering high quality audits and are already working hard to make the necessary changes,” Catherine Burnet, head of audit at KPMG in the U.K., said in an emailed statement. “We are confident that the steps we have taken to date will result in improvements in future banking audit inspections.”
The regulator said it found significant weaknesses in KPMG’s audit of expected credit losses, valuation of financial instruments, and settlement and clearing accounts. The regulator said it would continue to focus on inspecting KPMG’s banking audits.
“We must continue to improve to ensure we deliver the highest quality audits,” Paul Stephenson, a managing partner at Deloitte, said in a statement.
“We’re continually looking for ways to improve,” Fiona Baldwin, head of U.K. audit at Grant Thornton, said in a statement.
“Strengthening the quality of our audits remains a top priority,” Hemione Hudson, U.K. head of audit at PricewaterhouseCoopers, said in a statement.
“We continue to make significant investments in audit quality,” Andrew Walton, Ernst & Young’s U.K. head of audit, said in a statement. “We recognise there’s still more to do.”
Write to Simon Clark at simon.clark@wsj.com
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Appeared in the July 24, 2021, print edition as ‘Auditing Firms Fall Short, U.K. Office Says.’
