In July, a court defeat by former National Social Security Authority (NSSA) chairperson Robin Vela left irreparable damage to the credibility of auditing firm BDO Zimbabwe.
BDO, a member of BDO International was left nursing wounds after the Constitutional Court upheld a High Court ruling that described the company’s NSSA audit report as biased, accusing the company of failing to apply its mind.
But before the wounds could heal, a damning report on BDO International by the Financial Reporting Council (FRC) added salt to the injury.
BDO Zimbabwe also had a running battle with First Mutual over its auditing, with the insurance company describing the auditing firm as lacking professionalism.
Below, we reproduce the damning report on BDO International that was published after auditing mishaps in Zimbabwe.
BDO and Forvis Mazars warned over unacceptable audits
BDO and Forvis Mazars have been lambasted by the accountancy regulator in the annual audit quality review as needing to significantly improve.
Of the 92 audits inspected by the Financial Reporting Council (FRC) in its Annual Review of Audit Quality among firms with the largest share of the UK public interest entities (PIE) market, 74% were found to be good or requiring limited improvements.
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While audit quality for the Big Four has continued to improve over the past five years, the same cannot be said for BDO and Forvis Mazars (formerly Mazars).
With both firms’ inspection results declining significantly, the regulator warned both BDO and Forvis Mazars that if they do not see improvements in 2025, they may take stronger action including using their PIE audit registration powers.
In the most serious cases, the FRC has the power to remove registration from firms.
The FRC told BDO and Forvis Mazars to “urgently re-assess their recurring findings” to understand why previous quality actions have not impacted on audit quality.
“BDO and Forvis Mazars are strategically important, and we want to work with them to succeed among their peers. That requires urgent and decisive action to increase their standards on delivering high-quality audits.
“While we recognise that improving audit quality takes time, not least because of the timing differences between actions being taken and the audits being then performed and inspected, the progress that has been made has not met our expectations.”
Unacceptable audits
The FRC reported that there is a “widened gap” between the largest four firms and BDO and Forvis Mazars.
BDO performed the worst of all the tier one firms. The audit results of BDO that required no more than limited improvements declined from 2022/23’s 69% to 38%. In addition, two of the 13 audits inspected by the FRC were found to require significant improvements.
Forvis Mazars was also found to require more “focus on front-line audit delivery” after the percentage of audits inspected by the watchdog requiring no more than limited improvements declined from 56% last year to 44% this year. Meanwhile, nine of their audits inspected by the FRC required significant improvement.
This is a far cry from 2019/20 when 80% of Forvis Mazars’ audits required no more than limited improvements.
With the firms’ results worse than the prior year, the FRC branded both BDO and Forvis Mazars’ audit quality as “unacceptable”.
Recurring findings plague BDO
Specifically for BDO, the accountancy watchdog pulled the audit firm up this year over the audit of inventory and impairment of goodwill and intangibles. Recurring findings also still remained, such as the challenge and testing of estimates and assumptions, the audit of revenue and quality-control procedures.
The FRC also highlighted concerns over BDO’s system of quality management (SoQM), after the audit firm reported during the inspection period that it was not able to implement an effective SoQM.
BDO responded that it was “deeply disappointed” that its audit quality review (AQR) results had deteriorated after having improved the previous year, and recognised that it “must make significant progress”.
Responding to the report, BDO said: “We recognised it would take time for our transformation programme to positively impact our results, but we expected that, by now, based on our substantial investments in people, methodologies and training, and the reshaping of our book of business, they would have improved.
“As indicated by the results, we have not realised the anticipated returns from these investments quickly enough. However, the investments made have allowed us to respond faster and more effectively as issues have arisen, for example implementing the engagement level remediation programme for in-flight PIE audits.”
Disappointing grades for Forvis Mazars
Forvis Mazars, meanwhile, have been dogged over the past two years for recurring findings relating to evaluation and challenge in the audit of estimates and judgments, the audit of revenue and quality, and quality control procedures. The FRC said Forvis Mazars needs to “significantly enhance” the evidencing and monitoring of its SoQM.
The FRC recognised that Forcis Mazars has committed to improve and has invested significantly, but in the same breath noted that “this has not yet resulted in a sustained improvement in audit quality”.
Forvis Mazars expressed its disappointment with the audit quality review grades. “We continue to take positive actions in relation to consistently delivering high levels of audit quality and strengthening the firm-wide systems and audit quality function.
“Over the past year, we have dedicated significant focus to developing an audit quality transformation plan (AQTP), which was introduced in October 2023. While the audits inspected in this AQR cycle did not benefit from our AQTP, we anticipate next year’s results will reflect this investment.”
The FRC has increased the number of audits inspected of Forvis Mazars to 10 and BDO to 14.
Sustained improvement
On the opposite scale of the audit quality results, Deloitte, EY, KPMG and PwC were all credited in the report for their sustained improvement to “a level that is on average better than it has been since 2019”.
Of the percentage of audits only requiring limited improvements, Deloitte was the highest at 94% (with one requiring significant improvements), then KPMG whose results improved from 74% last year to 89%; followed by EY and PwC at 76%.
The FRC’s executive director of supervision, Sarah Rapson, said: “The FRC welcomes the audit quality improvement at the largest four audit firms, particularly the improvement in FTSE 350 audits, which are some of the most complex and systemically important UK audits. This progress demonstrates the considerable efforts to improve audit quality firms have made over a number of years.”
However, the FRC urged the Big Four to ensure progress is maintained. “We want them to consolidate their improvement, and ensure they are not either being complacent or de-risking their portfolios contrary to the public interest.”
Meanwhile, the most common findings from inspections that need addressing continue to be in the audit of revenue, and estimation and judgment. The FRC said the latter was often linked to weaknesses in the evaluation of key assumptions and judgment, and the challenge of management.
