By Huw Jones
LONDON -Britain’s accounting watchdog set out best practice guidance on Thursday to show auditors how to challenge what they are told by companies after handing out fines for failures to show sufficient scepticism.
Company collapses at retailer BHS and builder Carillion have thrown the spotlight on audit quality, triggering three government-backed reviews with legislation promised to reform the audit market, though no timetable has been set.
The Financial Reporting Council is putting pressure on EY, KPMG, PwC and Deloitte in particular to raise standards as they audit more than 90% of Britain’s top 350 listed companies.
“Professional judgment is a fundamental requirement for high quality audit,” said the Financial Reporting Council in what it described as the first guidance https://www.frc.org.uk/getattachment/fff79ba1-3b5a-4c04-8f1e-eb8df3aacd40/FRC-Professional-Judgement-Guidance_June-2022.pdf of its kind from a regulator.
“We would encourage those firms who do not yet have their own professional judgment framework to consider the merits of developing one, or applying the FRC’s,” the watchdog said.
Many of the sanctions imposed by the FRC on auditors cite insufficient scepticism, including a 1.9 million pound fine for PwC this month for its audit of Kier, and a 3.3 million pound fine for KPMG last month for its audit of Rolls-Royce.
Britain has proposed replacing the FRC with a more powerful watchdog, but until legislation is passed the FRC is seeking to use existing powers to drive up audit standards.
On Wednesday the FRC proposed that auditors publish 11 audit quality indicators to show how well they are performing so that customers can make comparisons.