The UK’s audit watchdog, the Financial Reporting Council (FRC), has blasted audit giant Deloitte over the quality of its pension fund audits.
In a hard-hitting review, the FRC’s Audit Quality Review inspection report on Deloitte said the auditor must toughen up “the firm’s audit approach in relation to defined benefit pension scheme balances and disclosures”.
Deloitte said it had already taken steps to address the areas of weakness flagged up by the FRC’s inspections.
Unveiling the findings, Melanie McLaren, FRC’s executive director for audit, said: “This year’s reports on our reviews of individual audit firms reflect the FRC’s focus on promoting continuous improvement in audit quality.
“For the first time, we asked the firms to carry out a root cause analysis into each of our key findings before developing proposed actions and discussing these with us.”
The FRC’s Audit Quality Inspection Report identified a number of concerns on audits relating to DB scheme balances and disclosures.
The findings placed Deloitte as the worst performer on pensions audit issues among the big four audit firms.
Globally, Deloitte ranks as the number two audit firm behind PWC but ahead of EY and KPMG in the earnings stakes.
In particular, the FRC AQI report identified three main concerns with Deloitte’s pensions audit work:
- Membership data and the verification of employer contributions
- Lack of evidence the auditor fully examined the risks associated with a sponsor’s new investment strategy
- Inadequate controls around the custodian confirmation process
But the FRC praised Deloitte for having in place “effective strategies and procedures for the audit of investments held by an investment trust and a pension scheme”.
The FRC, in addition its responsibility for the UK Corporate Governance and Stewardship Codes, also sets UK standards for accounting, auditing and actuarial work.
Its Audit Quality Review (AQR) team monitors the quality of the work of those UK firms that audit public interest and large AIM entities.
The report comes at a politically sensitive time for the Big Four audit firms.
Financial reporting scandals such as Tesco and HBOS in the UK have seen both the auditors and the FRC come under mounting pressure.
The FRC singled out a step change in corporate culture as a priority in its 2016-17 annual plan.
The plan notes: “We will concentrate on promoting a step change in audit quality and on driving up standards of governance, stewardship and reporting.”
The FRC’s examination of audit quality covers the six largest audit firms for 2015-16.
In response to the findings, Deloitte said: “We have reinforced the procedures audit teams should be performing in the area of defined benefit pension scheme balances in corporate entities.
“The guidance includes reinforcing the need to evaluate the accuracy and completeness of data provided by management to actuaries, and the required level of control over the custodian confirmation process.”
Stephen Griggs, managing partner for audit at Deloitte, told IPE: “We share the FRC’s objective to promote improvements in the quality of auditing and welcome this report.
“The report provides a balanced view of the focus and results of the AQR’s inspections, and it is an accurate reflection of our efforts to improve audit quality across our practice over a number of years.
“We take seriously all feedback from the FRC, and we have already taken steps to address areas that have been highlighted for improvement.”