BDO fined £200,000 for AEL audit breaches

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The sanctions announced by the accounting watchdog this week relate to a single breach in the 2014 audit where there was a failure to document the relevant work and in 2015 where there were breaches in three areas of audit work on provision for claims, with questions raised around the opinions of independent expert actuaries.

The FRC disciplined BDO with a fine of £200,000, which was later discounted to £160,000 for the firm’s admissions and early disposal. On top of the fine, the respondents have to pay the executive counsel’s costs of £129,500 for the investigation.

David Wyn Roberts, the BDO partner with 30 year’s auditing experience, was the statutory auditor of AEL and signed the audit reports on behalf of BDO. For his involvement, he also received a reprimand from the FRC.

In the first breach during the FY2014 audit BDO partner exchanged emails with the independent actuaries (auditor’s expert) which led him to conclude that AEL has complied with the ABI SORP. However, the emails were not included on the audit file and thus the failure to document a significant matter arising during the audit meant BDO had breached paragraph 8 of ISA 230.

Then in the FY2015 audit, there were three more breaches. The first related to the use of the independent actuaries. The Final Decision Notice explained that BDO’s communication with the auditor’s expert after their draft report was limited to an undocumented brief conversation.

The other breaches related to BDO’s testing of management’s accounting estimate and the data it was based and the evaluation of the method of measurement used by management.

The watchdog also ordered BDO to implement a training programme to improve the quality and consistency of their processes, particularly around evaluating independent actuarial audit evidence and in documenting the processes and the auditor’s judgements.

In addition, BDO has to undertake a quality performance review for two years and report the results annually to the FRC.

“The failings in this case related to an area of high audit risk, namely the consideration of an insurance company’s approach to its provision for claims,” said Jamie Symington, deputy executive counsel to the FRC.

“The auditors relied on the opinions of independent expert actuaries without taking sufficient steps to gain an understanding of or to evaluate their work.”

The FRC noted that both BDO and Roberts had a good compliance history and disciplinary record with no prior sanctions under the AEP or Accountancy Scheme. In the Final Decision Notice, the executive counsel also took into account the steps BDO has already taken in adopting a number of measures to address their audit failings.

BDO’s exemplary record was further tarnished earlier this month by the FRC’s audit quality report, where 38% of the firm’s audits required “no more than limited improvements”. The percentage of inadequate audits put BDO as the third-worst among the top seven auditing firms. The report also found 25% of its audits were marked as severely failing.

Leading the ‘table of failure’ this time was Grant Thornton with 45% of audits requiring no more than limited improvement, followed by KPMG with 38% inadequate audits.

At the time of the AEL audit, BDO was ranked as the sixth-largest audit firm in the UK, with an audit income of £165m and UK revenue of £469m. In the intervening period, BDO leapfrogged nearest rival Grant Thornton and became the fifth-largest firm on the accountancy league table due to its merger with Moore Stephens.

https://www.accountingweb.co.uk/business/finance-strategy/bdo-fined-ps200000-for-ael-audit-breaches