AIU warns PwC over reducing audit hours

PwC’s focus on reducing audit hours to improve efficiency has come under fire from the audit regulator in the latest inspection report on the firm, which audits 458 UK entities including 37 FTSE 100 companies and 63 FTSE 250 companies.

The Audit Inspection Unit – the inspectorate arm of the Financial Reporting Council – found that PwC’s ‘Audit Transformation’ programme stated intentions to improve audit quality, focus on key judgment areas and standardise PwC’s approach. Instead, the programme concentrated on reducing audit hours so as to improve efficiency.

The AIU told PwC: ‘The firm’s strategy identified quality as a key performance goal; however, the firm continues to focus on growing the business and achieving efficiencies in the conduct of audit work. The firm should ensure that there is no adverse impact on audit quality as a result of its initiatives to improve audit efficiency in the light of competitive pressures.’

Earlier this week, AIU head of audit Paul George, fired a warning shot to auditors in the wake of findings that companies could face severe risks if auditors continued to make cuts to their work as a result of pressures to reduce fees.

‘We’re already seeing a potential for greater risk. We’re suggesting that firms look at having central controls for this... to ensure that individual audit teams are not compromising quality,’ said George.

Note was also made of the PwC’s increasing use of offshoring through two centres in India and Poland. In 2011, offshore work accounted for 4% of the firm’s core audit hours and is expected to increase to 6% in 2012.

The AIU review of 14 PwC audits covers FTSE 100, 250 and other large companies, a small percentage of the firm's 458 annual UK audits.

At least 10 of these – one FTSE 100 entity and three FTSE 250 companies - were companies incorporated in offshore jurisdictions such as Jersey, Guernsey and the Isle of Man.

At least one audit signed off by PwC – which had a £2,461m turnover for the June 2011 year end, inclusive of £909m in audit fees - was considered to require ‘significant improvement’. Inspectors took issue with the firm’s audit of goodwill and intangible assets for this particular audit, finding there was insufficient evidence to support the level of internally generated costs capitalised in the year.

Eight other audits were audited to ‘a good standard’ and five others were ‘acceptable’ overall with improvements required.

The AIU also took exception to the firm’s communication with audit committees - finding that in nine cases there was insufficient reporting to the audit committees of the nature and extent of threats to the firm’s objectivity and independence arising from non-audit services provided to audited entities and the related safeguards applied.

In two other cases, PwC auditors failed to report unadjusted misstatements while aspects of the audit plan and/or audit findings were also not communicated sufficiently.

On internal issues, the AIU said that partners carrying out the firm’s engagement quality control reviews were not held to account for the proper performance of their roles.

Partners were also promoted without directly addressing audit quality considerations, and in the majority of cases, did not evaluate their performance against audit-quality related objectives.

Get the latest news in your inbox. Sign up to receive the Accountancy Live e-newsletter, HERE

Tweet