EY remains a bright spot in ASIC’s audit quality report

While acknowledging the impact of Covid-19, Australia’s national corporate regulator has found little overall improvement in audit quality over the past financial year – although EY continues to be a bright spot.

Professional services firm Ernst & Young has come out ahead of its Big Four rivals in the Australian Securities and Investments Commission’s latest annual inspection into audit quality, having improved its auditing for the third consecutive year. Covering statements for the last financial year to July, ASIC found little overall improvement among Australia’s six largest providers, although did acknowledge the impact of Covid-19.

According to the corporate regulator, its review of 45 risk-targeted audit files found an increase in the percentage of key areas where insufficient effort was made to obtain reasonable assurance that financial reports were free from material misstatement, with a ‘negative finding’ rate of 32 percent all up. Among the six largest auditors, close to a quarter of the 115 key areas reviewed came up short, roughly the same as for ASIC’s previous quality inspection.

While recognising the impediment of adapting to remote working for both auditors and clients, along with other Covid-related impacts such as travel restrictions and staffing issues, ASIC Commissioner Sean Hughes urged the firms to keep focused. “ASIC calls on audit firms to continue to evaluate the effectiveness of their current initiatives and revise them or implement new and improved actions if they are not achieving appropriate outcomes.”

Across the Big Four together with BDO and Grant Thornton, which collectively perform auditing duties for 93 percent of ASX-listed entities based on market cap, EY demonstrated both the most improvement and highest quality, halving its negative finding rate from 14 percent in the last inspection to 7 percent this year. Deloitte was the only other improver, although its percentage of 29 percent, down from 35 percent, still sits behind PwC at 25 percent.

“We are very pleased with the recently announced results for FY21, continuing the downward trend since 2019,” said EY Oceania Assurance Leader Glenn Carmody. “This has been a remarkable achievement and we are extremely grateful for the hard-work and resilience of our audit teams who remained laser focused on quality, despite the very difficult circumstances under which audits needed to be performed during the Covid pandemic.”

Grant Thornton meanwhile tracked in the other direction, its negative finding rate ballooning from 27 percent to 45 percent. Achieving the second highest quality, BDO remained steady from the last inspection at 20 percent, while PwC and KPMG slipped slightly, the latter to 30 percent. ASIC notes that it purposefully targets a limited number of high-risk audits, and so wouldn’t expect these figures to remain consistent across the larger market.

Still, the regulator remains concerned about the results of its snapshot, and says that the largest number of negative findings continue to relate to the audit of asset values and impairment of non-financial assets and the audit of revenue, the latter growing from 29 percent to 40 percent. The greatest factor contributing to revenue and receivables negative findings was that the procedures performed did not address the level of risk assessed.

Hughes concluded that despite the conditions, the results warranted a continued concerted effort from auditors to improve quality. “The need to properly inform the market and investors through financial reports continues to be important in the context of Covid-19 and requires auditors to respond to potentially more difficult judgements on asset values, liabilities, solvency, going concern and disclosures, as well as challenges from remote working arrangements.”