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UK Company Audits Need to Improve, Regulator Says

From WSJThe Financial Reporting Council found that auditors often fail to provide enough evidence to verify companies’ accounting estimates.

Audits of financial statements of Britain’s largest companies need to improve, the U.K. Financial Reporting Council said Thursday.

The country’s audit and accounting watchdog in recent months inspected 130 company audits. Most of the businesses are listed on the FTSE 350 index and largely have year-ends between July 2018 and June 2019. Forty-nine, or nearly 38%, required improvements, up from 25% in last year’s report, the FRC said.

In many instances, auditors failed to provide enough supporting evidence to assess companies’ accounting estimates and other judgments about the future. Auditors too often relied on assumptions their clients made, instead of challenging them, the FRC said.

“Despite there being examples of good auditing, auditors are still not delivering to a consistently high standard,” David Rule, the FRC’s executive director of supervision, said in a statement.

U.K. audit firms, including the Big Four—Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG—have come under pressure in recent years following a string of corporate scandals and failures, including the collapse of construction and outsourcing giant Carillion PLC in 2018.
The U.K. government and the FRC are currently working to overhaul regulation of the sector. As part of the changes, the FRC is set to become part of a new regulatory body, the Audit, Reporting and Governance Authority.

Thursday’s review did not capture the impact of the coronavirus pandemic on audit quality. Auditors have grappled with the added strain of verifying companies’ financial statements remotely amid the pandemic. Next year’s review of 2020 audits is set to cover part of the pandemic period, the FRC said.

The regulator for this year’s review expanded the scope of inspections to focus more on how auditors address fraud risk and assess financial disclosures related to companies’ overseas businesses.

The FRC said it examined fewer audits this year—down from 160 in 2019—due to constraints around resources and the wider scope of the inspections. It said it plans to inspect about 145 audits next year.

The regulator on Thursday also released a letter explaining its reporting expectations for companies in the year ahead, including additional disclosures on the impact that the pandemic and economic uncertainty have had on companies’ finances.

 

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