The Financial Reporting Council (FRC) is calling for improvements in the audit of pension balances and disclosures in company accounts, after an analysis of examples included in its latest audit inspection found almost half had deficiencies.

In 2017/18 the FRC reviewed 125 audits and selected 51 audits of entities with significant pension schemes for in-depth investigation. In a quarter of audits the regulator identified good practice in aspects of the pensions audit work performed and in eight audits it identified no areas for improvement.
However, in just under half of the audits reviewed the FRC found at least one aspect of the audit work performed over pensions where limited improvements were required. In two of these audits, the weaknesses identified in relation to aspects of the pensions audit work performed contributed to assessing the overall audit work as requiring more than limited improvement.
The FRC says that in many cases the existence of multiple pension arrangements and/or financial and risk management transactions, such as liability-driven investment strategies, partial buy-outs and longevity swaps, have made valuation judgements and their audit complex.
It says auditors can bring about improvement by assessing the sensitivity of the valuation to changes in assumptions, clearly evidencing the work done by actuarial experts and the rationale for conclusions reached, and considering whether the source data used to calculate the valuation of the defined benefit obligation is materially accurate and complete.
The FRC recommends that auditors identify different categories of investment assets and obtain sufficient audit evidence to support the valuation of each, and pay attention to evidence to support the allocation of the defined benefit obligation and pension scheme assets in multi-employer schemes.
Further improvements can be made by focussing on the completeness and accuracy of the pensions related disclosures; not just the valuation; and considering whether given the material nature and risks, the audit work on pensions should be explained in the auditor’s report.
The FRC says where companies have significant pension scheme balances, it expects audit committees and auditors to discuss the findings in the report and consider whether the audit approach taken could be enhanced.
Melanie Hind, the FRC’s executive director, audit and actuarial regulation, said: ‘The valuation of pension obligations is complex, requiring significant judgements and assumptions which carry the risk of material misstatement and/or manipulation. ‘Auditors need to understand the work of actuaries inputting to their work and pay attention to assets as well as liabilities. We hope to raise standards by highlighting good practice and areas for continuous improvement.’

The audit of defined benefit pension obligations findings from 2017/18 audit quality reviews is here
 

Report by Pat Sweet