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UK MPs call out FRC over audit augmentation

MP Rachel Reeves expressed concerns about the failure of the Financial Reporting Council (FRC) to identify augmented audits, in its role as a regulator of the industry.

During the Business, Energy and Industrial Strategy Committee (BEIS) meeting, it was noted that KPMG self-reported augmentation on the Carillion file.

Reeves said: “What gives us the worry really is that, how can you tell if something has been augmented and are you discovering these things?

“As you say it was KPMG who pointed out this augmentation not the FRC, but I presume you were crawling all over the file after the collapse of Carillion but it wasn’t you the regulator who actually discovered this.”

Stephen Haddrill who is set to step down as the CEO of the FRC  said that the audit inspection team were “seriously concerned about some of the things they found”, and therefore took the matter to enforcement.

Haddrill said while it was KPMG who self-reported the augmentation, this is what the FRC expected of firms. He commented: “The other thing that we do is make it clear to the firm or any firm that if they find that there is some wrong doing of any kind that they self-report to the regulator.  And it’s our job to make sure the firm is very clear about that.”

The question was posed whether the FRC would have discovered the augmentation if KMPG had not self-reported, to which Haddrill replied he was confident that with forensic investigations the FRC would have in fact discovered augmentation in the Carillion file.

Haddrill said: “What we expect is for the audit file to be in good shape in the sense that all the relevant papers, all the judgements that the auditor has reached are properly documented – that’s locked down and then after a period it becomes available to the FRC.

“If something is added to that file after that period when the file has been closed, we would generally regard that as inappropriate. Particularly if it was done with the view to creating any kind of deception in relation to anybody but I must stress that I am talking about a general situation.”

Preventing companies from augmenting

The numbers of augmentation over the past five years have been requested by MP’s at the select committee.

Haddrill said:  “When we review the file we are looking for a number of things. We are looking at if the audit plan was satisfactorily set out and agreed with the company.

“We are looking at whether the key audit matters that the company, the auditor and the audit committee have identified have been properly reviewed by the auditor and we look to make sure that the file makes sense, and nothing appears to be in the wrong place, and if we find that we take action accordingly,”

MP’s expressed their worry about the regulators role in not clamping down on augmentation of audits. The BHS audit was brought into question in regards to augmentation, by Reeves. Haddrill admitted, “There were steps taken around the timing and date of which the audit was signed off that were incorrect so yes there was in that case.”

Haddrill defended the FRC’s role as a regulator and commented on how the regulator would identify details added on to the audit file, once it had been dated and closed.

Haddrill said:  “We do forensic analysis of the documentation and people make mistakes. You can look at the computer records. The technology may well show that something has been put on after the event and on a paper file you can see that things don’t seem to fit in.

 

By Mishelle Thurai 

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