The biggest accountants are producing shoddy audits at one in three companies, according to a damning report from the industry watchdog.
Britain's top seven accounting firms repeatedly fell short of expected standards last year, the Financial Reporting Council (FRC) found in a study which will spark fresh fears that the embattled industry is failing to spot signs of trouble.
Regulators said the shortfall was “unacceptable”.
MPs earlier this week called for the FRC to be replaced urgently with a beefed-up regulator to prevent further high-profile corporate failures like those at Thomas Cook, Carillion and BHS.
The proportion of audits found to require improvement or significant improvement jumped to 33pc from 23pc in the previous year's study, although this may partly reflect the watchdog’s decision to focus on higher risk audits and the wider scope of this year’s inspections.
The regulator also reduced the number of audits it reviewed,saying this was due to a lack of resources.
David Rule, executive director of supervision at the FRC, said firms were still failing to consistently achieve the required level of audit quality. He criticised their culture despite finding some improvements and warned that some staff may feel unable to speak out about problems in businesses' books.
Mr Rule said: “The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions.
The worst player among the largest so-called Big Four auditors was KPMG, which was hit by half of all industry fines last year. Just 58pc of its FTSE 350 audits were up to standard., the FRC said.
Deloitte had the best results with 90pc of its FTSE 350 audits and 76pc of all its audits requiring no more than limited improvement.
The regulator said that firms must make difficult decisions to improve audit quality, even if it sometimes meant delaying or modifying audit opinions or losing business from clients.
Audit firms are meant to be a crucial line of defence for shareholders and are paid millions of pounds to check the accounts of major companies. But the industry has been repeatedly accused of sloppy work, missing massive scandals and an unhealthy closeness to the businesses whose homework it marks.
In the past week Grant Thornton was fined £3m for years of failings, including doctoring its own records, and the FRC asked a tribunal to fine Deloitte a record £15m for serious failures in its audit of scandal-hit tech firm Autonomy.
Grant Thornton recorded the worst score out of the top seven firms with only 55pc of its audits requiring no more than limited improvement.
The results come a week after the FRC announced that the Big Four will have to ringfence their consulting arms from their audit practices to boost auditors’ independence.
At present, consulting profits are shared with audit partners. It is feared this means firms are likely to tone down criticism of a client's books in the hope of winning lucrative contracts.
The FRC plans to step up its supervision of firms and boost the number of quality inspections it carries out in 2020-21. From next year, individual companies audited can be named if both the auditor and the business give consent.