FRC warns BDO of need to improve audit quality
The Financial Reporting Council has warned BDO that its audit work is below par - despite improvement from last year. The news comes after the regulator’s annual inspection identified persistent shortcomings in the firm’s audit quality, placing it at the bottom of the class for the UK’s major audit providers.
The annual inspection of the UK’s top-tier auditors examined 104 audits conducted by PwC, KPMG, Deloitte, EY, BDO, and Forvis Mazars. Previously, it had also included Grant Thornton, but the Financial Reporting Council (FRC) dropped the firm from the list in 2024, after the firm withdrew from bidding for many of the sector’s largest clients.
In that narrowed field, BDO has been singled out by the watchdog, which called on the firm to "urgently and robustly reassess how to improve its audit quality". Half of BDO’s cases reviewed by the FRC were found to be satisfactory, or only requiring "limited improvement" - but even though that is an improvement from 38% in 2024, that still places the company "significantly short of expectations".
BDO’s case, the FRC reviewed a sample of 14 audit files out of 206 eligible for inspection, from a total portfolio of 6,805 audited entities. Speaking on its findings, the FRC added BDO "must not be complacent and ensure change happens at pace."
It comes as the Big Four firms - Deloitte, EY, KPMG and PwC - demonstrated "steady and consistent improvement" in audit quality, according to the watchdog. However, that also coincides with the quartet - which had been under pressure following a number of high-profile accounting scandals - having been accused of ‘de-risking’ their client base, offloading certain customers deemed higher risk. While critics contend this may be behind the Big Four’s improvement - even as their FRC fine spiral - those clients were also often picked up by mid-tier firms.
Piece of the PIE
In recent years, BDO has made significant progress on winning work from public interest entities (PIEs), including listed companies, banks and insurers. The firm currently audits the third-highest number of PIEs, a notable feat for a mid-tier player aiming to challenge the dominance of the Big Four. But the FRC’s findings may note the risks of picking up these clients - especially without the quality controls in place to accommodate their increased risk.
That is not to say it is impossible to strike such a balance. The FRC also found that rival Forvis Mazars showed marked improvement. With 90% of its audits requiring no more than limited improvement, the firm saw a marked boost from 44% in the previous year - even though both Forvis Mazars and BDO have previously been denied the opportunity to ‘de-risk‘ their own portfolios.
