The corporate regulator has put auditors on notice as audit quality continues to fall despite the big six accounting firms improving their results.
Audit quality dips despite big six improvement
ASIC’s latest review of audits of financial reports by auditing firms of all sizes for the 12 months to 30 June 2020 has found that 27 per cent of audit files contained issues, up from 26 per cent in the previous corresponding period.
The largest numbers of adverse findings were in the audit of asset values, particularly the impairment of non-financial assets and the audit of revenue.
The largest six auditing firms managed to improve their audit results, with 24 per cent of audit files lacking assurance that the financial statements were free from error, down 2 per cent for the 12 months to 30 June 2019.
However, Deloitte and PwC both went backwards, with ASIC finding issues with 35 per cent and 23 per cent of their files, up from 32 per cent and 18 per cent respectively.
BDO recorded the largest improvement in the 2020 financial year by 9 percentage points, closely followed by EY which improved by 8 percentage points and KPMG by 7 percentage points.
Grant Thornton rounded up the top six by improving their result from 31 per cent to 27 per cent.
According to the corporate regulator, these six largest audit firms audit 96 per cent of ASX-listed entities based on market capitalisation.
ASIC maintained that adverse findings do not necessarily mean that the financial reports audited were materially misstated. Instead, it believes the auditor did not have a sufficient basis to support their opinion on the financial report.
The corporate regulator has also acknowledged that its findings are based on a selection of a limited number of audits and audit areas on a risk basis, and has urged against extrapolating the results to the entire population of audited entities.
However, ASIC commissioner Cathie Armour has sounded a warning to audit firms to work towards significantly reducing the number of instances where auditors do not obtain reasonable assurance that a financial report is free of material misstatement.
“The current findings suggest firms’ action plans have not sufficiently improved audit quality,” said Ms Armour.
“Firms must strengthen existing initiatives and implement further new initiatives to improve audit quality. This includes enhancing a culture focused on audit quality, the experience and expertise of partners and others, supervision and review of audits, and accountability of partners and others for audit quality.
“The current review relates to audits of financial reports up to 31 December 2019 and largely, does not reflect the impact of COVID-19 conditions where audit quality, and the need to properly inform the market and investors through financial reports, will be even more important.
“There can be more difficult judgements on asset values, liabilities, solvency, going concern and disclosures, as well as challenges from remote working arrangements. Auditors need to respond to these conditions in their audits.”
CPA Australia general manager of external affairs Dr Jane Rennie said that while the transparency of ASIC’s findings was welcomed, care was needed in interpreting the results.
“While the report is helpful for identifying areas for improvement for all audit firms, the results are not a definitive measure of audit quality in Australia overall,” said Dr Rennie.
“ASIC’s risk-based approach targets high risk audits and problem areas, which means that non-compliance is over-represented in the results.”