EY audit quality slides ahead of potential split

Audit quality at EY’s UK arm fell last year, according to an inspection from audit watchdog the Financial Reporting Council.

The FRC found that 35% of the EY audits it reviewed required improvements, an increase from 21% the previous year.

The FRC said it had not identified any “systemic reasons” for the fall in audit quality at EY, but called on the firm to “critically evaluate” its audit quality results and “consider how the learnings from this year’s reviews can be implemented to support audit quality in focus areas for strategic growth”.

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“We are disappointed that this year’s FRC inspection results are out of line with our improved performance in recent years. We know we can do better, and we are determined to deliver the high quality audits expected of us,” said EY’s UK audit head Andrew Walton.

The findings come as EY weighs a split between its audit and consulting arms, with a decision on the breakup of the Big Four firm imminent.

The FRC also called on fellow Big Four firm KPMG to make faster progress on improving its banking audits, but said its overall improvement of audit quality was “encouraging”.

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The FRC said audit quality at the seven largest UK audit firms had improved, with 75% of audits inspected graded as good or needing limited improvement, up from 71% in 2021 and 67% in 2020.

However, results at challenger auditors Mazars and BDO “remain unacceptable”, the FRC said.

Four of the eight audits reviewed at Mazars and five of the 12 audits reviewed at BDO required more than limited improvements, the FRC said.

“We are very disappointed by the findings,” a Mazars spokesperson said. “We are committed to addressing the issues which have been identified as part of our continuous quality improvement plan.”

“We’re disappointed this year’s grades do not meet the standards expected by the regulator and our leadership team, and will continue to work hard to fully address the FRC’s findings,” said BDO audit head Scott Knight.

FRC’s chief executive Sir Jon Thompson said: “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.

“We will monitor closely the potentially negative impact on the public interest that the de-risking by firms of challenging audits may have on audit quality.”

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The number of audits requiring no more than limited improvement at KPMG was up from 59% last year to 84% this year, the FRC’s report said.

The FRC still had concerns over KPMG’s auditing of banks and similar entities, but said the firm had improved in this area as well.

KPMG UK’s chief executive Jon Holt said the results showed “our strategy and continued focus on audit quality is making a difference”.

“I am encouraged by the progress made in our banking audit outcomes, but I recognise we have more to do,” he added.

The FRC found that 83% of audits at PwC required no more than limited improvements, compared with 80% the previous year, while at Deloitte, 82% of audits required no more than limited improvement compared with 79% the previous year.

At Grant Thornton, all of the audits inspected were graded as good or requiring no more than limited improvements.

To contact the author of this story with feedback or news, email James Booth

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