POBA Publishes Big Four Audit Oversight Findings

by Robin Pilgrim, LawAndTax-News.com, London

24 June 2005

The Professional Oversight Board for Accountancy (POBA), part of the Financial Reporting Council (FRC), this week published the Audit Inspection Unit’s findings from its monitoring of the quality of the auditing function of the Big Four firms (Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG).

The review came about following the collapse of Enron in the United States, and other well-publicised corporate reporting failures, when the UK Government undertook to examine the regulatory regime for auditors and accountants.

The report, entitled ‘Review of the Regulatory Regime of the Accountancy Profession’, was issued in January 2003. That report recommended enhancing the monitoring of the audits of listed and other major public interest entities through a new independent inspection unit (the AIU) reporting to a professional oversight board (the POBA) within an integrated independent regulator (the FRC).

The AIU’s reviews of individual audit engagements indicated that the key audit judgments exercised in relation to financial reporting issues appeared, in the great majority of cases, to be both appropriate and soundly based. However, as a result of insufficient documentation, it was often necessary to form a view as to the appropriateness of such judgments on the basis of oral explanations provided.

The AIU explained that insufficient audit documentation both reduces the effectiveness of firms’ own quality control processes and makes it more difficult to adopt a monitoring approach focusing on key audit judgments (rather than an approach characterised by some as “box ticking”). The Unit referred two cases to the FRC’s Financial Reporting Review Panel where it considered that there was sufficient doubt as to whether the accounting treatment adopted and/or disclosures provided complied with UK GAAP (the issues concerned did not affect reported profits in either case).

The AIU inspections identified no systemic weaknesses in the overall policies, procedures and systems of quality control operated by the firms and indicated that, when properly applied, those procedures and systems should provide reasonable assurance that appropriate audit opinions are issued by the firms.

However, the AIU identified certain areas in which it considers that improvements to these policies, procedures and systems, and/or the application thereof, should be made, either to achieve compliance with relevant standards or to enhance audit quality.

The AIU stated that it believes that the risks the above matters pose for the quality of individual audit engagements should be addressed by the firms, and revealed that it is in the process of making a number of recommendations to each of the firms in their private reports as to the actions it believes are appropriate to address the issues arising from its work.

Speaking with regard to the newly published review, Sir John Bourn, Chairman of POBA announced that:

“We found that each of the Big Four firms of auditors have the necessary infrastructure in place, and commitment, to complete good quality audits. However, where the firms do not follow their own procedures they expose themselves to the risk that future audit opinions may not be appropriate.”

He went on to add:

‘We trust that all the firms will rise to the challenges which our work presents to them and expect the firms to implement our recommendations on a timely basis. We will review the extent to which they have done so during our 2005/6 inspections and report on this in our next public report in a year’s time.”

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