UK watchdog rams home good audit practice after company collapses

By Huw Jones

LONDON, Nov 16 (Reuters) - Britain's accounting watchdog
published on Tuesday what it believes to be the world's first
regulatory guide to what makes a good audit, to help stem
company collapses and continued compliance failings.

It is part of a broad effort to improve auditing standards,
with Britain due to set out legislative reforms in coming weeks
after failures at retailer BHS, builder Carillion and cafe chain
Patisserie Valerie prompted three government-backed reviews.

Nearly all blue chip companies in Britain are audited by EY,
Deloitte, PwC or KPMG, known as the Big Four, each of which have
been hit by steadily increasing fines from the Financial
Reporting Council (FRC) for lapses.

Regulators focus on poor compliance and typically don't
define what is good practice, but there is increased pressure to
improve quality given that only 71% of audits inspected by the
FRC meet the relevant standards, the rest having to be modified.

"People ask us all of the time what is a good audit," the
FRC said. "We think it's groundbreaking."

One example of good practice in the guide is for auditors to
robustly challenge what company officials tell them by obtaining
direct confirmations from customers to verify that revenue for
major contracts has been appropriately recognised, the FRC said.

Arranging meetings with a company's senior management to
challenge their assumptions on impairment of goodwill and going
concern judgements is another example.

The FRC said that while accountants are already familiar
with good practice highlighted in the guide, they are
inconsistent in applying it.

"The big firms know what is a good audit, but they don't do
it all of the time," the watchdog said, adding that it could
also encourage smaller accounting firms to take on audits of
bigger companies to increase competition at the top end of the
market.

(Reporting by Huw Jones; Editing by Hugh Lawson)

Carillion Plc