Much like here in the U.S. with the PCAOB, the Financial Reporting Council across the pond has been busy at work inspecting audit firms with a fine-toothed comb and handing out fines like beads at Mardi Gras (Financial Times calls it “swift with the stick”). At first these efforts were largely focused on Big 4 firms, naturally so as they audit just about every company in the FTSE 100, the 100 companies on the London Stock Exchange with the highest market capitalization. But now the watchful eye of the FRC is burning a hole in the back of auditors’ heads at the smaller firms and the receivers are not happy about it.
The FRC’s aggressive stance on audit quality and the increased attention that comes with it are not going over well at the mid-tiers according to an opinion piece by Michael O’Dwyer published in Financial Times yesterday.
If the audit market was once a wild west, rife with cosy relationships and low standards, some in the profession feel the regulatory pendulum has swung too far in the other direction, potentially discouraging smaller players from stepping up.
For firms like BDO and Mazars, tighter regulation makes their aim of auditing more large listed companies costly and painful ahead of reforms that would require FTSE 350 companies to have part of their audits done by a non-Big Four firm.
“The regulatory pressure is becoming unbearable,” says a senior auditor at one mid-tier firm of the demands from FRC supervisors.
The increased regulatory burden means the FRC is “cementing the oligopoly” of the Big Four, says a senior partner at another firm, lamenting the resources required to respond to constant requests from the watchdog.
This sudden heavy hand on the part of audit regulators couldn’t possibly be more ill-timed. Why couldn’t they get tough on audit quality back in 2010 when firms had a surplus of warm bodies to throw at audits? Now, with audits staffed by cardboard cutouts of seniors, they want to get extra tough on firms huh?
Writes O’Dwyer, the FRC isn’t stopping at mid-tiers. Of the 14 publicly announced audit investigations launched by the FRC in the past two years, nine have been against firms outside the Big 4, he says. Some of them you’ve never even heard of.
No article about mid-tier and lower firms would be complete without a totally unnecessary but hilarious dig at them. O’Dwyer did not let us down.
The firms also fear fines and reputational damage if things go wrong. Their concerns are well-founded given that FRC inspections have found work by auditors outside the top seven are of lower quality.
So any firm that isn’t BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars, or PwC sucks. Not that those seven are exactly killing it in the audit game either. Last July, the FRC called out Mazars and BDO specifically for “unacceptable” inspection results. Four of the eight audits reviewed at Mazars, and five of the 12 audits reviewed at BDO required more than limited improvements. This has brought increased scrutiny — “specific supervisory plans” — at these firms.
O’Dwyer says regulators cracking down on audit firms and their sloppy work was “overdue after years of bad practice” but coming down too hard on them could potentially push the smaller firms right off the map. Growth ambitions must also be tempered by a focus on quality first and foremost, said the FRC in its 2022 audit quality review. Meaning audit quality comes first, sub-Big 4 firms needing to upgrade their technology and push paper to keep the FRC off their backs is not really their problem.