Deloitte is doing a great job keeping the Financial Reporting Council happy these days. Per the FRC’s recently released 2022 Audit Quality Inspection and Supervision Report, the audit watchdog is pleased with the progress the firm has made and the absence of serious deficiencies:
In the 2020/21 public report, we concluded that the firm had made progress on actions to address our previous findings and made improvements in relation to its audit execution and firm-wide procedures.
The firm has continued to show improvement, with an increase in the number of audits we assessed as requiring no more than limited improvements to 82% compared with 79% in the previous year and 80% on average over the past five years. It is also encouraging that none of the audits we inspected were found to require significant improvements.
The area which contributed most to the audits requiring improvement was the audit of estimates of certain provisions. There were also key findings in relation to group audits, the review and challenge by the Engagement Quality Control Review (EQCR) partner and the application of the FRC Ethical Standard. However, in contrast to the prior year, most of the audits requiring improvement arose in non-FTSE 350 audits, with stronger results for the FTSE 350 audits.
Because of these improved inspection results, the FRC will reduce the number of audits inspected at Deloitte in proportion to the number of audits in scope, compared with other Tier 1 firms (the seven Tier 1 firms are BDO LLP, Deloitte LLP, Ernst & Young LLP, Grant Thornton UK LLP, KPMG LLP, Mazars LLP, PricewaterhouseCoopers LLP).
This time around 17 of the 348 audits in FRC scope were inspected.
Including that audit fee income slide just because.
The audits inspected in the 2021/22 cycle included above had year ends ranging from June 2020 to March 2021.
The FRC recognizes Deloitte’s efforts to improve its audit team communications and procedures:
The firm has continued to communicate the importance of audit quality and continuous improvement and shares emerging issues and good practices on a real time basis. There has been increased communications involving audit teams sharing their experiences with the wider audit practice, often through webcasts. This reinforces audit quality messages and can make them more relatable.
The firm has recognised that there is a need for a central team with clearly defined and dedicated responsibility for identifying and implementing an appropriate response to consistent and recurring findings (our 2020/21 public report, noted that more effective responses for findings that continued to recur was needed).
Deloitte is of course pleased with the FRC’s assessments. From the firm’s inspection report response:
We are proud of our people’s commitment to delivering high quality audits and we continue to have an uncompromising focus on audit quality. We are pleased that both the overall and FTSE 350 inspection results for our audits selected by the FRC as part of the 2021/22 inspection cycle show an improvement. This reflects our ongoing focus on audit quality, and we will maintain our emphasis on continuous improvement as we seek to further enhance quality.
The response also includes actions Deloitte will undertake to ensure continued improvement; Deloitte will establish a Continuous Improvement Group (CIG) led by a senior audit partner “to review and challenge the response to the identified root causes of the findings from the FRC 2021/22 inspection cycle.”
And some more audit quality acronyms:
In response to the FRC’s observations, we are also forming an Actions Development Group (ADG), comprising workstream leaders from across the business, which will formalise our existing processes and ensure consideration across functions around the development of actions which
then flow into the Audit Quality Plan. These actions and the Audit Quality Plan will be reviewed and challenged by the CIG to ensure that actions are designed effectively and promote consistent audit execution. We have also enhanced our causal factor taxonomy which will be released over summer 2022 effective for the 2023 inspection cycle, in response to the FRC observations. Our robust root cause analysis (RCA) process together with the establishment of the CIG and ADG will enable us to address recurring findings in a more effective manner.
Overall good news for Deloitte UK. The firm has seen similar improvement on our side of the Atlantic; of 53 Deloitte audits inspected by the PCAOB in 2020, only two had significant deficiencies. High fives all around.