Serious Accounting Problems Found In 40 Percent Of Audits, Watchdog Says

Forty percent of audits inspected by the International Forum of Independent Audit Regulators (IFIAR) included serious problems, according to news from The Financial Times on Monday (March 12).

The IFIAR found accounting lapses in about 40 percent of the 918 audits of public companies inspected in 2017. The inspections targeted businesses with complex accounting needs or those with risky situations, like merger and acquisition activity. The IFIAR said the most common issue identified in its inspections was a failure by auditors to “assess the reasonableness assumptions,” followed by a failure among auditors to “sufficiently test the accuracy and completeness of data or reports produced by management.”

The analysts’ report found 41 percent of issues identified by regulators’ auditing inspections in 2017 were related to issues of independence and ethics, such as an auditor having a financial relationship with a client.

The publication said the IFIAR’s conclusions add to skepticism over the reliability of major accounting and auditing firms around the world, following the high-profile collapse of several conglomerates due to accounting failures.

Among those failures: Carillion, the now-defunct U.K. government contractor and Brazil oil giant Petrobras.

In the U.K., auditing giant KPMG faced backlash for its failure to spot financial troubles at HBOS ahead of its collapse during the financial crisis. The auditor has also faced criticism over its work with Carillion, as well as for failing to spot fake accounts opened by Wells Fargo employees.

In response to the IFIAR’s findings, Essex University accounting expert and Emeritus Professor Prem Sikka described the situation as “terrible” in an interview with the FT.

“There are a whole range of issues, and there is no simple fix,” he said. “There is a huge knowledge failure in the audit industry which is not being looked at. The whole industry is ripe for reform. The question is, where is the political will for this?”

“The auditing industry is so concentrated, once the largest firms set the standard for poor conduct, the whole industry is dragged down,” added University of Oxford Blavtnik School of Government Professor Karthik Ramanna in another comment to the publication.