The Quality of Audit Reports Prepared in New Zealand in 2015 is Appalling.

By law, many firms in New Zealand are required to pay for a report that is probably not worth the paper its written on.

Four out of five audit reports reviewed by the FMA in NZ were NOT of a good standard, and two thirds failed to meet even the minimum standards.

Who benefits from a law that requires something to be done that cannot be relied upon? Certainly not the shareholders or investors in these entities.

The Financial Markets Authority (FMA) has just released their review of audit quality standards in New Zealand for the year ended June 2015. At first glance the press release paints a rosy picture, "The number of audit firms in New Zealand performing at a good standard is on the rise; ... " but it goes on to say "... however a large proportion of firms still need to make further improvements to the quality of their audits" - (Click here for the full NZ FMA press release on Audit Quality Standards)

The FMA has to tread a fine line, they are tasked with monitoring financial market participants and enforcing relevant laws but they also need to keep on side with the various industry participants. It will be hard for them to do their job if they get off-side with all the accountants. (You don't have to be an auditor if you are an accountant but you do have to be an accountant to be an auditor.)

It's the second part of the FMA's statement that drew my attention. I remembered seeing the appalling results last year and foolishly assumed that action would be taken, something would be done. I thought that there would be outrage and the accounting profession would move heaven and earth to make sure their audit colleagues pulled their socks up. Sure the results are better than last year but that's like being told that having 80% of your money stolen is better than having 90% of your money stolen.

Some NZ audit firms are charging companies for reports that are rubbish.

And by law, we - as shareholders or investors have no choice? We just have to suck it up? Remember the majority of Kiwi's are now investors in New Zealand companies through their KiwiSaver accounts. Why isn't there outrage? What am I missing? Doesn't anyone else care?

This isn't for the accounts this is for the audit of the accounts that you've already paid good money to have prepared. And these things aren't cheap. One of our local "financial market participants" - First Mortgage Managers paid $78,000 for their audit in the 2015 year. It might have been one of the good ones, it might not, we have no way of knowing. I like to think it was.

There are 12 registered audit firms in New Zealand. By law "financial market participants", such as banks, listed companies, finance companies and other entities must have an audit report performed. But why? What is the point? The FMA's report shows that four out of five times audit reports fail to meet the minimum required standards. It is simply appalling. Companies are wasting their money and by law they are required to do so.

The FMA's report doesn't release the names of the firms that do the good reports or the companies that have the bad reports, We have no idea whether any given audit report on any given company was up to standard or not. We have no idea which, if any, auditors only did good reports or if they all do bad reports.

I'm sure there are auditors who exceed the minimum standards and prepare reports that are worthwhile and can be relied upon but who are they? How do we find them so we can ignore the rest?

But the results of the survey do tell us that about four out of five reports are not good. So shareholders and investors would be foolish to reply on audit reports. But then who ever has? The only useful audit report is a qualified report (they tell you, you should definitely avoid investing without further investigation) and they are few and far between. Every prospectus and every annual report of every listed company or finance company that has failed in the last few years has had an audit report. They are completely worthless. So why do they have to be prepared? What's the point? Who benefits?

The full FMA Audit Quality Review Report reports along with previous years can be found here >> http://fma.govt.nz/news/reports-and-papers/statutory-reports/audit-quality-review-report/

In 2015 there were 1700 audit reports submitted. The FMA reviewed a sample of 38 files. Of those 13 were for listed companies and 25 for other entities.

The FMA's report says "The audit files we select for review tend to be more risky and more complex than the norm. The results are therefore different than we would expect to see in a neutral sample." Does that mean the others are likely to be better or worse? Surely you put your most experienced, senior staff on a risky and complex audit? But we don't know. They only selected 31, 1.8% of the total. Is that enough to be statistically significant? The FMA seems to think so. And looking at the previous two years results, they are probably right. Not much point in going any further, why will the rest be any different?

The results are shown in the report as percentages. It obscures the truth, lets turn them back into numbers, it's easy to do.

• 18% were "... completed to a good standard ..." , that must be seven of the reports, less than one in five was described as good.
• The other 31 were NOT described as "completed to a good standard", therefore they are not good, in other words bad. Four out of five or 82% of the audit reports reviewed by the FMA were bad.
• 45%, nearly half, 17 reports required SIGNIFICANT improvements. The other 37%, 14 reports, only required improvements.

I've been unable to extrapolate this from the actual report but the press release says "... Nearly 37% of the audit files met the minimum requirements of the Auditing Standards ..." that must be 14.

That means two thirds of the audit reports prepared in the 2015 year, reviewed by the FMA, that were of a risky or complex nature, FAILED to meet the MINIMUM standards.

It's an outrage, it's legalised theft, most audit reports are not fit for purpose therefore they are a waste of money, your money and my money.

Questions I've put to the FMA, I'll append their answers when I get them.

1. Are there any fines or penalties for those audit firms failing to meet the standards?
2. Is there any thought to repealing that part of the regulations that requires audit reports until investors can have some faith in their quality? As it stands they are misleading at best.
3. Can you release the names of those companies whose reports met the minimum standards and those that didn't?
4. Can you release the names of the audit firms who prepared reports that didn't meet the minimum required standards and those who did?
5. Why was it deemed necessary to word the press release in generally favourable light when the figures are so appallingly bad?
6. Are the companies who's reports failed to meet the minimum standards made aware of that fact?
   And I doubt you can answer this but
7. If the answer to 6 is yes Do you know if any of the companies who have paid for substandard reports got a refund from their auditors?

Their response which was received on 15 January 2016 can be found here >> Response from FMA on Audit Report Questions