BDO and Mazars were criticized by the UK accounting regulator for the “unacceptable” quality of their audits after the mid-tier firms received the worst scores in industry inspections for the second year running.
The inspection results underline the difficulty mid-tier accounting firms face as they try to win a greater share of a market dominated by the Big Four — Deloitte, EY, KPMG and PwC — while ensuring their work meets the regulator’s requirements.
Only 58 per cent of the 12 BDO audits inspected were deemed up to scratch by the Financial Reporting Council, a slight improvement on last year’s score of 44 per cent. Half of the eight Mazars audits examined were of an acceptable standard, the watchdog found.
KPMG recorded a significant improvement, with 84 per cent of its audits in the top category, compared with 59 per cent last year when it was singled out for criticism by the FRC.
The improvement in KPMG’s results “is promising, but is not yet a trend”, the FRC said, adding that it would continue to “closely monitor” the firm’s banking audits, which scored poorly in the previous three years.
Across the seven “tier one” accounting firms, 25 per cent of company audits inspected were deemed to need either some improvement or significant improvement, compared with 29 per cent in 2021.
The scores for audits of large listed companies were better than those at other companies, with only 12 per cent of FTSE 350 inspections needing improvement or significant improvement.
“While it is encouraging to see some improvement in audit quality at the largest audit firms, consistent, long-term improvement is still required across the market,” said Sir Jon Thompson, chief executive of the FRC.
The watchdog has been trying to improve the quality of audits of large UK companies after auditors failed to raise red flags ahead of high-profile corporate failures, such as construction company Carillion and bakery chain Patisserie Valerie. The government has also promised reforms to help mid-tier firms compete with the Big Four oligopoly by requiring large companies to hire a smaller auditor to carry out part of their assessment.
Among the other firms, 83 per cent of PwC’s audits were given the highest score, while Deloitte received 82 per cent.
EY’s results dipped, with only 65 per cent of its audits receiving the best score compared with 79 per cent a year ago. However, none of the 17 EY audits inspected were in the bottom category, where the FRC finds significant improvements are needed.
All five audits by Grant Thornton, the UK’s sixth-largest auditor by revenue, were deemed up to scratch. The firm has improved its scores in the past two years, but has not attempted to grow its share of the audit market for large companies.
The FRC also fired a warning shot at auditors seeking to avoid fines or poor inspection scores by limiting their involvement in higher risk audits.
BDO, Mazars and EY said they were disappointed with their inspection results and were investing to increase their resources and the quality of their work.