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Third of all company audits fail accounting watchdog tests

The FRC found 29 of the 88 audits reviewed in its annual spot check among the seven largest auditors needed ‘more than limited improvements’.

A third of all company audits by Britain’s main accounting firms failed this year’s quality tests in an “unacceptable” showing from the under-pressure sector, according to the industry watchdog.

The Financial Reporting Council (FRC) revealed that 29 of the 88 audits – 33% – reviewed in its annual spot check among the seven largest auditors needed “more than limited improvements”.

This compares with 16% a year ago.

While firms have made some improvements and we have observed instances of good practice, it is clear that further progress is requiredDavid Rule, FRC

It found just two thirds of the audits were of a good standard or required limited improvement.

The findings heap yet more pressure on the sector after a series of accounting scandals in recent years, including failed outsourcer Carillion and cake chain Patisserie Valerie.

The FRC said the number of audits requiring more than limited improvements “remains unacceptable”.

David Rule, executive director of supervision at the FRC, added: “While firms have made some improvements and we have observed instances of good practice, it is clear that further progress is required.

“The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.”

The FRC reviews audits each year from accounting firms Deloitte, EY, KPMG, PwC, BDO, Grant Thornton and Mazars.

The regulator said last week that the Big Four firms –  PwC, Deloitte, EY and KPMG – must build a Chinese wall between their audit arm and the rest of the consulting business by October to end conflicts of interest.

A raft of high-profile company administrations in recent years have exposed audit failures across the industry.

The most recent collapse of Wirecard has seen EY – its auditor of 10 years – come under fire over the missing two billion euros in the German payments group’s accounts.

PA