Last checked at 
* KPMG's performance 'unacceptable', says audit watchdog
* KPMG says audits 'robust', must do better in inspections
* BDO's performance also well below par, says watchdog
* ICAEW says FRC audit review has 'lost its way'
(Adds business ministry response)
By Huw Jones
LONDON, July 23 (Reuters) - KPMG's bank audits needed
improvements for an "unacceptable" third year running and the
accounting firm will be closely monitored, Britain's auditing
watchdog said on Friday in an unusually blunt assessment of
leading accountants.
The Financial Reporting Council (FRC) said checks of 103
audits by KPMG, PwC, Deloitte, EY, Mazars, Grant Thornton and
BDO from 2019 and 2020 showed nearly a third required
improvement, only a marginally better outcome than in its
previous annual survey.
The results pile more pressure on the government to propose
legislation to change corporate governance and the audit market
after its consultation on recommendations in three
government-backed reviews following the collapse of British
retailer BHS and building firm Carillion.
"Inspection results at KPMG did not improve and it is
unacceptable that, for the third year running, the FRC found
improvements were required to KPMG's audits of banks and similar
entities," the FRC said in a statement.
"KPMG has agreed additional improvement activities to be
delivered this year over and above its existing audit quality
improvement plan," said the watchdog, which did not disclose
which specific company audits it had checked.
KPMG UK, whose major banking clients include Barclays
, said the company was committed to delivering
high-quality audits and was already working hard to make the
necessary changes the FRC had highlighted.
"Whilst we know we have more to do to improve the inspection
outcomes, our banking audits are robust and the findings do not
call into question our audit opinions," Cath Burnet, KPMG UK's
head of audit, said.
"We are confident that the steps we have taken to date will
result in improvements in future banking audit inspections."
KPMG is also facing a hefty fine from the FRC for its
auditing of Carillion.
Britain's business ministry said the FRC report underscores
the need to reform the audit sector, which is already underway.
Decisions have not yet been taken on when the government
will publish a response to its consultation, or in exactly what
form, a ministry spokesperson said.
The FRC said improvement measures were also expected at
so-called challenger accountants BDO, which is headquartered in
Belgium, and Mazars, which is based in France.
Deloitte, EY, Grant Thornton and PwC improved overall, with
about 80% or more of audits requiring only limited changes, but
the FRC said this score still fell short of its expectations.
EY said it was able to maintain audit quality standards
despite challenges from the COVID-19 pandemic, but recognised it
had more to do.
CHALLENGER HOPES
The ICAEW, a professional accounting body based in London,
said the FRC audit check "has lost its way".
"It has become an exercise in compliance checking and the
public admonishment of auditors, and it does little to improve
audit quality, foster innovation or encourage new entrants into
the audit market," the ICAEW said in a statement.
The FRC said the most common issues were in relation to
revenue, impairment of assets, and group audit oversight.
Five of the nine BDO audits and three of seven at Mazars
needed more than limited improvements, the FRC said.
Only 44% of BDO's audits required no more than limited
improvements while the equivalent figure was 57% for Mazars and
59% for KPMG, the FRC said.
The government is pinning hopes on "challengers" to take on
more auditing work at blue-chip companies and dilute the market
dominance of PwC, Deloitte, KPMG and EY, known as the Big Four.
Mazars said it was disappointed with the findings in this
year's FRC report and it was addressing the issues identified.
"We are fully supportive of the FRC's efforts in holding our
sector to account, and in demanding improvements in the quality
of audit work," said David Herbinet, Mazar's head of audit.
Scott Knight, BDO's head of audit, said it was working hard
to address specific findings and investing in extra resources
such as increasing it audit headcount by more than 250 people or
14% within the last year.
Government plans to force Big Four auditors to share blue-
chip clients with challenger firms has faced a major push back
from companies, which say limits on the Big Four's market share
would work better.
(Reporting by Huw Jones; Editing by Dhara Ranasinghe, Tomasz
Janowski, David Clarke and Louise Heavens)
