Auditors such as KPMG LLP and PricewaterhouseCoopers LLP must do better when it comes to compiling a key part of companies’ annual reports, their U.K. regulator warned.
The “Other Information” section is often inadequate and doesn’t meet the same standards as other parts of the report, even though it contains information vital to investors, the Financial Reporting Council said. The regulator told auditors to implement better procedures and targets and to place more emphasis on non-financial information.
The report is the latest blow to an industry that’s been criticized for alleged failings in the global financial crisis and in corporate collapses such as this year’s Carillion Plc liquidation.
Much of the problem arises from misunderstandings, the FRC said. The opinion that an auditor provides on a report’s financial statements doesn’t cover the “Other Information” section, something that investors often don’t realize, according to the regulator. The FRC said it will look at whether auditors should be required to take more responsibility for the information in this section.
The regulator looked at the work of 30 audits by BDO LLP, Deloitte LLP, Ernst & Young LLP, Grant Thornton U.K. LLP, KPMG and PwC. In an annual report, “Other Information” covers everything apart from the financial statements and the audited parts of the directors’ remuneration report.
It includes items such as the strategic report and directors’ report, and has grown to the extent that it’s usually larger than the financial statements themselves, the FRC said. Auditors must review “Other Information” and ensure there’s no “material inconsistency” with the rest of the report, according to the FRC.
The regulator also said:
• It will consider implementing assurance requirements as part of its wider Future of Corporate Reporting review, launched in October.
• Revisions to auditing standards in 2016 raised the bar on what was expected in “Other Information,” but auditors haven’t responded consistently to the additional expectations.
• Standards on training since the 2016 review have been patchy, and auditors must ensure that staff compiling this section have enough experience.
• The rules on compiling this section aren’t “prescriptive,” and companies often don’t provide enough guidance to their auditors, leading to inconsistencies.
— With assistance by Silla Brush