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The UK’s Financial Reporting Council’s (FRC) audit inspection results have shown a “fall in quality” of the largest accounting firms with only 72 percent requiring no more than limited improvements, while in the previous year 78 percent needed no more than limited improvements. The FRC is calling on the UK firms to take action to “swiftly reverse” the decline.

FRC CEO Stephen Haddrill stated: “At a time when public trust in business and in audit is in the spotlight, the Big 4 must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and skepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances.”

Among the actions being taken by the FRC are: reviewing the effectiveness of root cause analysis by firms to see if the resulting action plans address the FRC’s concerns; implementing a new audit firm monitoring approach which focuses on five key pillars of (1) leadership and governance, (2) firm values and behaviors, (3) business models and financial soundness, (4) risk management and (5) evidence of audit quality; and taking action when appropriate under the Audit Enforcement Procedure.

According to Bloomberg, in two weeks in June 2018, the FRC levied more fines than it had in all of 2017, with fines against PricewaterhouseCoopers and KPMG. In relation to PwC’s 2014 audits of BHS and Taveta Group, the FRC fined PwC $13.2 million, gave it a “severe reprimand” and made the firm responsible for detailed monitoring of its Leeds Audit Practice for the next three years. KPMG was reprimanded and fined $4.2 million for its handling of the Quindell audit. The FRC’s audit quality inspection report of KPMG LLP stated: “Whilst we have seen improvements in certain areas where we have raised findings in previous years (for example, the audit of revenue), we are concerned that previous changes to the firm’s policies and procedures have not brought about the improvements required to the overall quality of audits we reviewed.”

In a report released on July 10, “Scepticism: The Practitioner’s Take,” the Institute of Chartered Accountants of England and Wales states: “The idea of scepticism is not easy to pin down and the urge to use it, or rather the lack of it, as a catch-all classification for anything that is wrong in auditing or financial reporting, should be resisted.” For regulators, the ICAEW states: “What may need to be considered in this context are the logistics of opening the databases of information held by national and international regulators – safely – to demonstrate more clearly what they believe good looks like, and of applying analytics and machine learning to that data.”