A couple weeks ago the Financial Reporting Council in the U.K. released the results of its latest inspections of the Big 4 firms plus Grant Thornton, BDO, and Mazars, and it was the same ol’ story: audit quality is still really bad. How bad? Like one-third of the 88 audits reviewed during the 2019-20 inspection cycle being complete horsecrap bad. I’m sorry, “unacceptable” was the word the FRC used.
Some firms sucked more than others, but we’re going to start our review of the seven firms’ inspection reports with the one that sucked the least—Deloitte.
You might recall that Deloitte & Touche got to do a victory lap in early June after having the lowest audit deficiency rate (11.5%) among the six U.S. firms whose 2018 inspection reports were released by the PCAOB. That’s great and all, but Deloitte U.K. was the only firm to reach a target set by the FRC a few years ago, that at least 90% of FTSE 350 audits should be “good or requiring no more than limited improvements.” Deloitte did that in nine of 10 FTSE 350 audits reviewed by the U.K.’s audit cops.
In total, the FRC reviewed 17 Deloitte audits, and 76.4% needed little to no improvements. Of the remaining four audits, three required improvements and one was significantly bad.
Here are the areas where Deloitte auditors are still making screw-ups, according to the FRC:
- On four audits there was insufficient assessment or challenge of management’s cash flow forecasts. On one of these audits, there was insufficient evidence for the appropriateness of the cash flow assumptions, including the impact of historical forecasting inaccuracies and errors in the cash flow models. The issues on the other audits included the impairment assessment not being undertaken at a sufficiently granular level, insufficient support for forecast contract renewals and inadequate justification for the level of cash flows used as the basis for the remaining forecast period.
- On two further audits we raised issues about the extent of audit evidence supporting the audit team’s conclusions on the level of impairment or available headroom. In one of these audits, the audit team modelled a number of potential scenarios, including factoring in more pessimistic industry forecasts, but there was insufficient support for the weighting placed on the different scenarios. In another case, the audit team did not sufficiently demonstrate to what extent the downside risks in the forecasts could be mitigated by other revenue streams.
- In addition, on one of these audits, there were differences between the forecasts underpinning the impairment review and those used in the going concern assessment; the audit team did not reconcile the impairment and going concern cash flows.
But overall, Deloitte has had a pretty good run of having more high-quality audits than botched audits since 2015-16, as this graph from the FRC indicates:But it only goes downhill from here folks, as many of the other six U.K. firms inspected by the FRC can’t seem to get this audit quality thing figured out.