UK regulator calls out BDO and Forvis Mazars over audit quality
July 30, 2024
Financial Reporting Council review finds shortcomings in firms’ audits for fourth straight year
The UK’s accounting regulator has criticised BDO and Forvis Mazars for shortcomings in their audits for the fourth straight year, and threatened to take “stronger action” against them if there was no improvement.
In its annual review of audit quality published on Tuesday, the Financial Reporting Council said the gap between the Big Four — Deloitte, EY, KPMG and PwC — and the mid-tier firms had widened.
“Disappointingly, BDO and Forvis Mazars’ performance has fallen significantly below our expectations,” said Sarah Rapson, executive director of supervision at the FRC. “Both firms are strategically important to the UK audit market and the wider UK economy, so it is vital that they deliver on their agreed improvement plans.”
The regulator said it would continue to apply “more intensive supervision”, adding, “we may take stronger action, which could include using our PIE [public interest entity] auditor registration powers, if we do not see improvements in 2025”.
The FRC has the power to ban firms from auditing PIEs — listed companies, banks and insurers — which is regarded as a “nuclear option”, according to Rapson. It can also introduce less stringent measures such as ordering firms to first ask the regulator for permission if they want to take on new clients.
The declining quality of BDO and Forvis Mazars’ work underlines the challenge mid-tier accounting firms face as they try to wrestle market share from the dominant Big Four.
At BDO, the most successful of the mid-tier firms in winning more business among FTSE 350 companies, less than 40 per cent of the 13 audits inspected by the FRC were found to require no more than limited improvements. Two audits required “significant improvement” — the lowest score.
“These results are worse than the prior year and continue to be unacceptable,” the FRC said.
At Forvis Mazars, 44 per cent of the nine audits inspected required no more than limited improvements, compared with 56 per cent last year, while one required significant improvement.
Mid-sized firms such as BDO and Forvis Mazars have ambitions to break the stranglehold of the Big Four on the audits of large UK companies — the Big Four check the books of 98 per cent of the blue-chip FTSE 100.
However, BDO and Forvis Mazars have lagged their larger rivals in recent years as they have struggled to make the necessary long-term investments in technology, training and quality control to meet the FRC’s requirements.
Of all the audits inspected this year, the FRC said nearly three-quarters were categorised as good or requiring limited improvements, with the regulator citing a “trend of general improvement” over the past five years from the Big Four.
Ninety-four per cent of Deloitte’s audits received the highest quality rating, followed by KPMG on 89 per cent. PwC and EY were ranked joint lowest of the Big Four on 76 per cent.
Paul Eagland, managing partner at BDO, said the firm was “deeply disappointed” with its results this year. He added: “Comprehensive actions and plans, shared with our regulators, have been and are being implemented to address each of the areas identified.”
Phil Verity, UK chief executive of Forvis Mazars, said: “We are disappointed with this year’s results and recognise that we have not consistently met the desired levels of audit quality . . . we will continue to invest in, and focus on, applying the highest quality standards in our work, so that we can play our full part in the UK PIE audit market.”
[The Financial Times]
