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BDO U.K.’s Audit Quality Is In the Same Class with Rivals PwC and KPMG

Thumbs down BDO LLP

Next up in our review of the most recent Financial Reporting Council audit quality inspection reports are the top midtier accounting firms, or as the U.K. calls them, the “challenger firms” to the Big 4. Let’s start with the firm that’s closest to the Big 4 in terms of revenue—BDO.

Bravo Delta Oscar recently got its first scolding from the FRC because its 2014 and 2015 audits of AmTrust Europe were less than stellar. But usually the FRC pays no mind to BDO, unlike KPMG and Grant Thornton, because BDO’s audit quality is typically pretty good.

For example, in BDO’s 2018-19 inspection report, the FRC reported that only one of the eight BDO audits inspected required improvements, while the other seven were considered “good or required minor improvements.” BDO’s response at that time was:

We are pleased with the results of the FRC review in relation to the firm for 2018/19 but nevertheless we are not complacent and we fully recognise the importance of continuing to focus on improving the quality of our audits. Quality is a key focus for the firm and underpins our firm strategic principles.

Well, it looks like a certain three-letter firm did get complacent with audit quality in 2019-20. The FRC said:

We reviewed eight individual audits this year, including a FTSE 350 audit, and assessed only 62% of them as requiring no more than limited improvements.

The findings that most contributed to the results of those reviews classified as requiring improvements were issues surrounding the audit of revenue, particularly the testing of the accuracy and occurrence of revenue and the quality of substantive analytical procedures. We note that a number of key findings identified in our reviews related to shortcomings in core auditing processes. The firm should take robust action to address our concerns.

We will closely monitor and assess the promptness and effectiveness of the firm’s actions to address the findings raised. Should the firm’s response not address our concerns adequately, we will take further action.

That’s not good, BDO. In fact, BDO’s 37.5% of audits inspected that required improvements or significant improvements was almost as bad as KPMG’s 38.9%. But at least KPMG didn’t have an audit that needed significant improvements, unlike BDO, which had two.

Here’s a graph showing how BDO auditors slacked off in 2019-20 compared to the past couple of years:As the FRC noted in its statement above, BDO auditors had a hard time with auditing revenue:

We reviewed the audit of revenue on the majority of audits we inspected and continued to identify issues with the audit of revenue on one or more of these audits:

  • The audit approach adopted did not provide sufficient assurance over the accuracy and occurrence of revenue recognised. In particular, in one case, the audit team did not consider the implication of weaknesses arising from IT work and any related impact on the integrity of data. Furthermore, the audit team did not assess and evaluate other work performed outside of the statutory audit. This work was needed to confirm the value of trades and support the revenue recognised.
  • Substantive analytical review constituted the main substantive procedure for certain income streams on some audits we reviewed. In two cases we identified examples where the substantive analytical review procedures performed were inadequate as the audit team’s expectation was not independent. On one of these audits, where revenue was identified as a significant risk, there was also insufficient follow-up and corroboration of the variances identified between the expectations set and the actual results.
  • On one of these audits, insufficient audit procedures were performed to corroborate the completeness of revenue derived from a system maintained and operated by a third party.

The issues outlined above cover a broad spectrum of work on revenue, focusing on the risks arising in respect of accuracy and occurrence. The firm should take prompt action to reassess the breadth and depth of their root cause analysis in relation to revenue, ensuring that its actions are properly embedded in enhanced audit procedures. This should be followed up and monitored through the firm’s audit quality plan using the hot review monitoring process.

Here’s the latest breakdown of audit failure rates (requiring improvements or significant improvements) including BDO:

Keep this up, BDO U.K., and you’ll be flunking 67% of your audits like your American counterparts in no time.

[BDO U.K. audit quality inspection report]