Mazars and BDO receive watchdog warning not to drop risky clients

14 July 2023 3 min. read
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Mid-market professional service firms Mazars and BDO have been warned by the UK's auditing watchdog that they risk breaching industry code, if they look to ditch problematic audit clients. The news comes as both firms were found to be lagging behind improvements in the audit market, for the second year running.

Each year, the Financial Reporting Council (FRC) carries out an annual health check of the UK’s accounting sector, examining company audits by the world's Big Four – KPMG, PwC, Deloitte and EY – as well as their top tier of competitors. This includes the likes of BDO, Grant Thornton and Mazars.

Over the last three years, the FRC has found a steady improvement in the auditing of KPMG, PwC, Deloitte and EY. This will come as some relief to the market’s four largest operators, who had been coming under increasing pressure to divorce their audit and advisory wings – as a number of high-profile client collapses led to suggestions conflicts of interest led them to overlook major weaknesses in company books.

Mazars and BDO receive watchdog warning not to drop risky clients

In the 2023 assessment, the FRC found that overall, 77 of 100 audits inspected for the last financial year were "good" or required only limited improvement, reflecting a 10% increase compared with 67% in 2020. However, among that there were some firms performing well below that average.

According to the FRC, BDO and Mazars continue to lag behind the wider pack, with "unacceptable" recurring findings at BDO in particular. This is similar to last year’s findings, when it was speculated that their performance was related to “growing too fast”, and taking on “high risk work” from clients dropped by Big Four auditors – who were allegedly looking to de-risk their portfolios, and so boost their performance averages.

De-risking strategy

"It is disappointing that there are still significant areas of their [BDO and Mazars] work that need to be addressed and the FRC will continue its increased level of supervision, requiring them to take further action to raise the quality of their audits in certain areas," stated Sarah Rapson, FRC deputy chief executive.

However, BDO and Mazars are likely to meet with resistance should they deploy de-risking to boost their own ratios. Recently introduced industry code means that if they shy away from checking the books of problematic companies – such as those deemed to have weak management controls – they may also incur the wrath of watchdogs.

The FRC clarified that resigning from auditing a challenging company would not necessarily be seen as an acceptable "de-risking" strategy. The organisation noted examples of this might include exiting audit roles due to the weaknesses of a client’s management, a breakdown in relations, or where the company refuses to pay a fair price.

As reported by Reuters, the FRC added, "Firms must... have sought to address and resolve concerns through all available mechanisms prior to resigning."

Over the last year, both firms have already exited a number of high profile audit gigs in the UK. Notably, August 2022 saw reports emerge that BDO was set to quit its role as auditor of beleaguered lifestyle management firmQuintessentially, while October saw the auditor begin to withdraw from its role at Everton Football Club – as the club struggled to stay afloat in the English Premier League. In November, meanwhile, Mazars quit its role auditing British Steel, after the client allegedly refused to pay for signing off on its books.