The government had previously called for a review of the British auditing industry following a series of scandals and failures in the auditing process.
This includes many I have covered before including Carillion, Thomas Cook and Patisserie Valerie. In another recent case, PWC are being sued by the administrators of JD Classics, a racing car dealership, for allegedly failing to spot fraud resulting in losses of more than £41m
In another case, EY faces a potential legal claim for over £1bn for its audit of NMC Health, and Carillion’s liquidators have secured funding for a £250m lawsuit against KPMG over the collapse of that business.
In a recent report by the Financial Reporting Council (FRC), they criticised KPMG for their ‘unacceptable’ failures to meet required standards in its audit of banks for the 3rd year running. Yes 3 years running! Mazars and Grant Thornton were also criticised and of Deloitte, the FRC said ‘improvements are needed to strengthen the effectiveness and consistency of the testing of revenue’ and of BDO the FRC said ‘it must improve, as a matter of urgency, the challenge and testing of estimates and assumptions in key areas of judgement’
Nothing seems to change. Year after year, failure after failure and little improvement.
What is clear is that you can’t rely on the audit process to pick up major issues. Which is why it is so important to have your own internal systems, checks and processes to pick up any issues, problems or fraud. These issues have been the downfall of many businesses and an expensive audit just might not spot them.
In all these cases, the frauds could and should have been spotted earlier and whilst it is imperative that the audit process is improved and auditors carry out a proper review, it is the company’s ultimate responsibility to keeps its own affairs in order and have the internal checks and balances in place.
Sometimes they may just be errors that are picked up, but if not picked up these small errors can become much bigger issues.
One set of systems should include reconciliation of invoices, accounts to bank statements and to cashflow, and stock.
Over the coming months we will be sharing some best practices to help with this.