The FMA’s Audit Quality Monitoring Report for 2021/22, released today, says audit firms have made improvements since previous reviews but audit quality remains inconsistent between firms. Auditors have better documented their judgements about accounting estimates and how they applied professional scepticism, continuing the trend from previous years.

The review is part of a three-year monitoring cycle of all licensed auditors, which scrutinises selected audit files for listed companies and other entities that report under the Financial Markets Conduct (FMC) Act. The FMA targets a sample of higher risk files, while others are randomly selected.

Audit firms play a crucial role in maintaining the integrity of New Zealand’s financial markets by ensuring an entity’s financial statements are accurate from an objective view. The FMA’s report is essential reading for auditors, preparers of financial statements, directors and audit committees.

The rate of non-compliant files has remained relatively consistent – 28% this year compared to 24% in the previous year. A non-compliant rating does not necessarily mean that financial statements fail to show a true and fair view or require restatement. As part of its monitoring, the FMA can ensure corrections are made when there are significant issues. Out of the 25 financial statements reviewed this year, the FMA identified one file was materially misstated, but a restatement was not required.

In the last two years only one out of 20 audit files of listed companies performed by the ‘Big 6’ firms were found to be non-compliant. In the previous two years, around one-third of files were non-compliant, consistent with international results.

Non-compliant audits of listed companies by the largest 6 firms

Most audit files were completed during COVID-19 induced lockdowns but this did not appear to impact audit quality. Additionally, the FMA made no referrals to disciplinary bodies this year.

Paul Gregory, FMA Acting Director of Capital Markets, said: “Over the last year we have seen audit firms make significant investments in their audit quality functions and software. We welcome this development but consider there are still several areas where improvements are required, particularly in relation to the documentation of evidence to support conclusions.”

Improvements over a decade
This is the FMA’s 10^th audit quality monitoring report, meaning the regulator has completed three full cycles of the industry.

Over three review cycles the proportion of non-compliant files has decreased from 45% (2012/13 - 2015/16) to 32% (2016/17 - 2018/19) to 29% (2019/20 – 2021/22).

Mr Gregory said: “As the audit quality regime has matured, we have seen long-term incremental improvements from auditors in several areas through our ongoing reviews and engagement with the industry. Our special focus on the importance of auditor independence has seen auditors take more steps to preserve this. Additionally, auditors have improved their documentation of how they treat key risk areas, allowing us to better assess if the audit procedures performed are sufficient.”

Auditor shortages and climate-related disclosures
The FMA report noted a shortage of experienced auditors is impacting the timely completion of audited financial information for investors and stakeholders.

Mr Gregory said: “We expect the audit profession to increase its focus on creating a sustainable future that can resist disruptions, such as workforce shortages. It is essential firms focus not only on filling vacancies, but on luring and developing the right talent over the long term.”

Additionally, climate-related risks will soon become an increasing focus of the FMA’s work in relation to both audit quality and financial reporting. This is due to the new climate-related disclosures regime, which will require around 200 entities to report on their climate-related risks, as well as existing requirements for FMC-reporting entities to report on current material impacts to their financial statements, which may include climate change.

Mr Gregory said: “Directors, senior managers and auditors need to be aware of our expectations and the requirements of the climate-related disclosures regime. If climate change impacts an entity, auditors need to consider whether the financial statements appropriately reflect this.”

ENDS

Download Audit Quality Monitoring Report for 2021/22 PDF.