Date posted: 16/11/2020 5 min read

FMA – audit quality improving, but concerns remain

The FMA’s annual review of the systems, policies and procedures of registered New Zealand audit firms and licensed auditors is out

In Brief

  • The Audit Quality Monitoring Report says the number of findings per audit file is falling
  • Concerns that number of files rated as ‘non-compliant’ stuck at around 35% of the total sample reviewed.
  • NZICA concluded two investigations into compliance with the auditor independence requirements and auditing standards.

The Financial Market Authority’s latest Audit Quality Monitoring Report for the year to the end of June 2020 says the number of findings per audit file has reduced over the years, an indication that audit quality is improving.

However, the reports says the FMA has not seen a decrease in the number of files rated as ‘non-compliant’.

“Over the past several years this has remained at around 35 percent of the total sample reviewed.”

A non-compliant rating does not necessarily mean that financial statements fail to show a true and fair view or require restatement.

The Audit Quality Monitoring Report is an annual review of the systems, policies and procedures of registered audit firms and licensed auditors. 

Key areas

In its 2020 report, the FMA has highlighted key areas that auditors and directors should focus on to improve audit quality including audit firms’ quality control systems, auditor independence and the adequacy of financial statement presentation and disclosure.

Sarah Vrede, FMA Director of Capital Markets, said “Audit files are selected for review on a risk basis, meaning these files have a higher chance of being non-compliant than files selected at random. This ensures we are targeting and revealing areas that may require improvement.

“Audit quality is a key priority for the FMA as it is a cornerstone of market integrity and investor confidence. Investors rely on audited financial statements and need to have confidence that they present a true and fair reflection of a company’s financial position and performance, particularly in this time of heightened economic uncertainty.”

CA ANZ Reporting and Assurance Leader Amir Ghandar FCA said “it is pleasing to see quality is continuing to improve, but we also agree this will continue to need focused commitment in the coming years. It is about constantly improving.

“Quality is paramount to trust and the vital role auditors play in integrity across the economy.”

CA ANZ is working alongside the New Zealand investment and business community on a proactive plan to improve confidence in audit.

The FMA review also checks progress against action plans provided by audit firms from previous reviews. While progress against these plans varied across audit firms, all firms have continued to make significant investments in audit quality.

The FMA report noted that while the pandemic related disruptions may have made it more difficult to complete an audit, this should not have compromised overall quality. The FMA also noted the expectation of auditors to engage closely with directors where information was of poor quality or difficult to obtain, and for any significant uncertainties to be assessed as part of the audit opinion.

Auditor independence continues to be a focus area for the FMA, since there is a perception of a conflict of interest for audit firms providing consultancy services in addition to assurance work. The FMA report noted evidence of improved documentation on audit files regarding independence. The proportion of fees generated by non-assurance services remains at 16 percent, when compared with total audit work for listed entities.

NZICA investigations

During the year to the end of June 2020, the New Zealand Institute of Chartered Accountants (NZICA, an accredited body responsible for audit licensing, monitoring, investigations and discipline) concluded two investigations into compliance with the auditor independence requirements and auditing standards.

The report says the accredited bodies identified significant breaches in the procedures performed by auditors in two cases, “but decided not to refer either of the matters to their disciplinary body for further investigation”.

Peter Vial FCA, New Zealand Country Head for Chartered Accountants Australia and New Zealand, said NZICA weighs up a number of factors when considering disciplinary action, including the seriousness of the conduct and the extent to which the public, including investors and other stakeholders, may have been put at risk. 

“Not every adverse outcome warrants disciplinary action.

We can require the firm and auditor to take certain remedial actions which we monitor, for example additional training and internal mentoring or assessments.  We can also require the firm to correct the matter in the following year’s audit.”

In the two cases referred to in FMA’s report, the audit firms have agreed to a range of remedial actions and the matters were corrected either in the entity’s financial statements or the audit report.

Audit Quality Monitoring Report

This year's report highlights key areas FMA stakeholders need to be aware of, along with expectations for directors and auditors of financial statements.

Read more

Update on plan to improve confidence

Discussions continue on a proactive plan for the audit profession in New Zealand. A final plan is expected to be ready early in 2021.

Find out more