The top accounting firms in the UK are having a watershed moment.
For the second year in a row, all of Britain’s top accounting firms have failed to meet the quality targets for client audits set by the Financial Reporting Council (FRC).
The FRC evaluates audit quality by reviewing a sample of audits from each accounting firm. 90% of a firm’s audits should be deemed sufficient or require only limited improvement to satisfy current FRC standards. This year, EY, KPMG, Deloitte and PwC—known as the Big Four—as well as BDO, Grant Thorton, and Mazars from the next tier down have all failed to meet this standard.
The FRC evaluates quality annually by reviewing a sample of audits from each accounting firm. For the year ending December 2017, one out of every four sample audits from Britain’s top 350 listed companies were found to be insufficient. Grant Thornton had 50% of their sample audits assessed as needing significant improvement.
Stephen Haddrill, the FRC’s chief executive has called the latest quality results unacceptable.
The Institute of Chartered Accountants in England and Wales (ICAEW), a professional accounting body, said the audit industry faces a “watershed moment” and the government should implement reform without delay.
How Audits Can Be Improved
The FRC said it found cases in all seven organizations where auditors failed to challenge management sufficiently, a recurring problem.
This idea that auditors failed to challenge management sufficiently requires some unpacking.
The prevailing explanation in recent years is this: the big accounting firms have become too cozy with the system they’re supposed to be keeping in check. The Big Four Accounting firms collectively audit 97% of US public companies and all of the UK’s top 100 corporations. By 2016, across 150 countries, the big four employed 890,000 people.
Richard Brooks, a reporter at The Guardian pointed out that the firms have avoided regulatory scrutiny because they have significant influence within the walls of government and are deemed to be, “too few to fail.” He wrote: “Left to prosper with minimal competition or accountability, the bean counters have become extremely comfortable.”
We think the issue is much more nuanced than what’s portrayed in the media.
During the past year, Hyperproof’s leadership team has talked to dozens of auditing professionals about how they work with clients and their challenges. What we learned is that they lack the tools to do their jobs effectively.
Our interviewees told us they manage audits through a patchwork of tools including spreadsheets, emails and home-grown file sharing systems. Auditors are bombarded with data of all formats from clients. These tools don’t allow auditors to efficiently process the deluge of documents and isolate the real problems within their client’s organization. As a result, auditors spend hours upon hours wading through document “dumps”, trying their best to figure out what’s going on.
The existing structure of the client-auditor engagement today also poses a challenge. Typically, audits are done once or twice a year. The evidence evaluated by auditors represent a mere fraction of an organization’s controls and programs. When auditors have access to only a sliver of compliance data and must complete an audit in just days, it’s all too likely for an issue to be missed.
Rather than conducting discrete audits once or twice a year, what if the auditor and their client shared information throughout the year?
Imagine how empowered auditors would become if they had continuous visibility into their clients’ compliance programs. If this became a reality, auditors would be able to understand the true state of compliance within an organization, isolate the hot-spot issues, and work with clients to resolve issues before they result in breaches, fines and reputational damage.
We believe this level of empowerment would be a game-changer for the industry. And we’re excited to tackle this challenge. Here at Hyperproof, we are creating a new system for compliance that makes evidence collection and collaboration between organizations and their auditors easier than ever before.
With Hyperproof’s innovative approach, an organization would have one place to manage all of their compliance programs, store compliance data and collaborate with their auditors on a continuous basis. Auditors would always have a view into their client’s compliance programs, and have as much access to data as a client is willing to share. We believe that transparency will lead to better outcomes for all.
To learn more about how Hyperproof can be used to simplify compliance and improve the quality of every audit, talk to us.