The gap in quality of work between the UK’s top four auditors and their Tier 1 challengers is growing according to UK accounting regulator the Financial Reporting Council (FRC). And its latest annual report contains strong criticism of challengers BDO and Forvis Mazars for the fourth year running.

The FRC says it intends to apply “more intensive supervision” of the firms, including “stronger action” which could include “using our PIE [public interest entity] auditor registration powers, if we do not see improvements in 2025.”

The regulator has the power to ban firms from auditing listed companies, banks and insurers – which it describes as a “nuclear option”. Less drastic measures it can apply include requiring firms to ask it for permission before taking on new clients.

Tier 1 audit firms

The findings come in the FRC’s annual review of audit quality, which assesses the performance of Tier 1 firms. They underline a growing gap between the Big Four firms – Deloitte, EY, KPMG, and PwC – and mid-tier challengers.

The report says that: “Over the last five years the largest firms have made substantial progress in improving audit quality.” However, a decline in quality was identified at BDO and Forvis Mazars and the regulator said: “Both BDO and Forvis Mazars must address why their inspection results have declined significantly and continue to commit to their investment in audit quality.”

Both firms are urged to “urgently re-assess their recurring findings to understand why previous quality actions have not had the impact on audit quality expected.”

Senior officials at both firms have expressed disappointment at the results and pledged to work on improvements.

FRC review findings

The FRC reviewed 92 individual audits across the six Tier 1 firms, and categorised 74% as either good or with limited improvements required. Total inspections of 39 audits of FTSE 350 companies were carried out, with 87% found to require no more than limited improvements. Only 4% of audits reviewed required significant improvements, with none of those carried out on FTSE 350 companies.

Sarah Rapson, Executive Director of Supervision at the FRC, said: “We are pleased that audit quality in the UK compares favourably internationally but it remains a key priority for the FRC to enhance the resilience of the UK audit market.

But she added:” The widened quality gap in the risk-based samples between the largest four firms and the other firms in the PIE market, BDO and Forvis Mazars, shows the ongoing need for proactive efforts to minimise this disparity.”