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The UK accounting regulator is under pressure to disclose the full results of its routine inspections of large corporate audits to protect shareholders and other stakeholders who could lose in misleading financial statements.
Activists for greater corporate accountability said in a letter to the Financial Reporting Council that the number of audits that should be significantly improved is “alarming” and that the names of the companies affected by poor audits are being disclosed should be.
The FRC announced in July that 29 percent of the 103 audits it reviewed required improvement or significant improvement, a level it believes was “unacceptably high”.
The watchdog publishes quality ratings for each of the seven largest accounting firms, but does not give a breakdown of which accounts the companies have not been properly audited.
Failure to identify the companies affected by substandard audits and provide details of the issues identified could undermine confidence in all accounts signed by accounting firms, the activists said in their letter to Sir Jon Thompson, FRC chairman.
“Trust in audits across the board is therefore undermined by this lack of transparency,” said the signatories of the letter, which included Spotlight on Corruption and Greenpeace UK.
Audit errors at the Patisserie Valerie café chain “underscore the need for more transparency” in quality reviews, they added.
Accounting firm Grant Thornton was fined $ 2.3 million last week.
Patisserie Valerie’s audit was reviewed as part of the FRC’s annual inspections months prior to the company’s acquisition, but the results were never made public, leaving investors and suppliers in the dark as to whether the watchdog had detected any issues.
“We believe that individual audits that meet unacceptable standards must be identified, and the basis for this conclusion must be adequately justified,” wrote the activists, who also included representatives from Project On Government Oversight, the Corporate Accountability Network , ClientEarth and the Global Legal Action Network.
“If this does not happen, the shareholders and other stakeholders of the company that has undergone an audit will not know that the audit they are relying on is not of the required standard.”
The FRC is currently prevented by law from naming companies whose audits are not up to date unless it gets their approval.
The activists asked the regulator if it had obtained company approval for identification and to explain how it works with company audit committees to ensure they address any issues identified.
The government’s white paper on audit reform, published in March, included a proposal that would allow accounting regulators to publish the results of their audit quality reviews without the approval of companies or their accounting firms.
However, the regulator is free to choose whether to disclose its full results or just a summary.
“We urge the FRC and its successor regulator to [the Audit, Reporting and Governance Authority]to put in place a mechanism to ensure that trade and legal secrecy issues do not lead to an unacceptable lack of transparency regarding poor audits, ”the activists said.
The FRC said it “supports proposals to publish the results of the audit quality review, although such publication would require legislative changes”.