FMA finds audit shortcomings but won’t name names

Monday 26th November 2018

The Financial Markets Authority says it continues to find inconsistencies in audits of listed and other companies that sell financial products to the public.

However, as usual, the FMA is keeping mum on which audit firms are transgressing, although it assures us its reviews are resulting in higher standards.

At least one case of poor auditing has come to light in the last year or so, the EY audit of the New Zealand arm of Fuji Xerox.

The new auditor, KPMG, reported accounting irregularities going back to 2011 that, when corrected, meant the New Zealand subsidiary had negative equity of $336 million.

The change in auditor followed a National Business Review investigation into Fuji Xerox that found the company had inflated its revenue, incorrectly reported third-party and related-party income and had generally engaged in “creative accounting”.

“Audit firms need to consider why audit quality varies significantly across individual files, even though the same policies and procedures are applied across all of the firm’s audits,” the FMA’s report said.

“We expect firms to invest more time to analyse the detail that underpins areas where we have found non-compliance,” it said.

The FMA’s capital markets director, Garth Stanish, says the regulator has no plans to “name and shame” and “that’s always been our practice and that’s in keeping with the practice of regulators internationally.”

FMA’s latest review of audits and audit firms covers five domestic registered audit firms, each of which have been previously reviewed, and 24 audit files, including nine of listed companies out of 190 NZX-listed companies and 1,300 other firms subject to Financial Markets Conduct Act audits.

It found only 23 percent of audit firms fully addressed previous findings of areas needing improvements.

Another 33 percent showed “significant improvement” and another 40 percent showed “some improvement” while 4 percent showed no improvement.

Asked whether he is happy with this rate of progress, Stanish says that “a number had shown significant improvement” and that the relatively low percentage of fully addressed previous findings “probably speaks more to the standards we’re expecting” than shortcomings of the firms involved.

“Of course, you would always like to see every single thing was addressed,” but there has been “a notable improvement in terms of the quality of the framework around auditing,” he said.

Asked whether investors deserved to know when there are shortcomings of the audits of the firms they invest in, Stanish said “I don’t necessarily think that’s the case” that investors are being deprived of information they should have.

The report found that since the FMA began monitoring audits in 2011, the number of registered audit firms has dropped to 19 from 40, although the number of licensed auditors has remained at about 140-150.

The main reason for the drop in firms was some firms voluntarily cancelling their registration due to an inability to comply with changes in assurance standards and the requirement that each audit of a company covered by legislation must have a least two licensed auditors.

But the FMA says it hasn’t been alerted to any FMC Act reporting entities having difficulties finding suitable auditors.

It notes that the disciplinary tribunal of Chartered Accountants Australia and New Zealand has investigated and censured one licensed auditor following a referral from the FMA. That auditor has voluntarily cancelled their licence and is prohibited from reapplying for a licence in the next two years. CAANZ sought to recover the $24,000 cost of its proceedings.

That was Auckland-based accountant Shane Matthew Browning who was charged with negligence or incompetence in a professional capacity in his audit work and of breaching the CAANZ code of ethics.

The FMA says that while audit firms play “a significant role in providing comfort on the quality and accuracy of financial statements,” directors and management “have primary responsibility for ensuring financial statements are compliant.”

(BusinessDesk)

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