The report by the global regulator summarises the results of recent inspections of audits of public companies, including critical financial institutions. The 30 audit reports cover audits handled by firms affiliated with the six largest international networks, BDO International, Deloitte Touche Tohmatsu, Ernst & Young Global, Grant Thornton International, KPMG and PricewaterhouseCoopers.

Lewis Ferguson, IFIAR chair and board member of the US Public Company Accounting Oversight Board (PCAOB), said: ‘The high rate and severity of inspection deficiencies in critical aspects of the audit, and at some of the world’s largest and systemically important financial institutions, is a wake-up call to firms and regulators alike: more must be done to improve the reliability of audit work performed globally on behalf of investors. The survey makes clear that these important inspection findings are prevalent across many nations and firms.’

The main problem areas identified in inspected audits of listed public interest entities, or public companies, relate to auditing fair value measurements; internal control testing; and procedures to assess the adequacy of financial statement presentation and disclosures.

When it comes to the audits of systemically important financial institutions, including global systemically important banks, the report highlights deficiencies in relation to auditing of allowance for loan losses and loan impairments; internal control testing; and auditing of the valuation of investments and securities.

Audit firms' own quality control systems had the highest number of inspection findings in the areas of engagement performance; human resources; and independence and ethics requirements.

Inspection findings are deficiencies in audit procedures that indicate that the audit firm did not obtain sufficient appropriate audit evidence to support its opinion. This may include a failure to identify or address a potentially material error in application of an accounting principle. IFIAR says most of its current findings are consistent with the results of its inaugural survey issued last year.

Janine van Diggelen, IFIAR vice chair, and head of the audit and reporting quality division at the Netherlands Authority for the Financial Markets, said the firms should develop robust ‘root-cause analysis’ to gain a clearer understanding of the factors that underlie inspection findings and to take appropriate remedial actions.

Van Diggelen said: ‘These measures should be aimed at improving their auditing techniques, as well as their oversight policies and procedures, but also consider the cultural and behavioural influences in the firms that were relevant to the deficiencies. Both audit firms and regulators must do more to improve audit quality.’
 

IFIAR said the global network firms have agreed to provide information about the results of root-cause analyses, the performance measures used to assess progress, and whether measurable improvements are being made, and it will continue to monitor the situation.

IFIAR is comprised of 50 independent audit regulators from jurisdictions in Africa, the Americas, Asia, Europe, the Middle East and Oceania. The UK’s Financial Reporting Council (FRC) is a member.