Report on Developments in Audit
The Development in Audit 2015/16 report is the first of its kind for the FRC as the UK’s Competent Authority for audit.
The overview report focuses on assessing justifiable confidence in UK audit and also summarises the current ‘state of play’ as seen by the FRC and its stakeholders. It is supplemented by a more detailed report of the FRC’s audit related activities and evidence gathering.
The FRC believes there is a justifiably higher level of confidence in audit as a result of changes to independence requirements and the promotion of quality as a driver for competition in the audit market. However, it also notes some remaining concerns around confidence.
We have also commissioned a second YouGov survey to benchmark confidence in audit in the UK. This indicates that stakeholders have a clearer understanding of what audit is and a higher level of confidence in it. But recent corporate failures and the resulting increased public scrutiny of auditors, have undermined some of this progress.
The FRC’s report on the current state of audit identified these key influences on confidence:
- Audit firms are seen as more independent and competing for audit engagements on quality grounds, but concern remains that the FTSE 350 audit market is concentrated across the Big Four firms, as the smaller firms are thought to struggle to match on skill level, resource and ability to bear the cost of tendering processes.
- EU regulatory changes have also bolstered confidence, with the introduction of mandatory rotation and the tightening of rules around non-audit service provision. However, some fear the increased public and regulatory scrutiny could deter future talent from joining the profession, thus impacting long-term quality.
- The FRC’s audit monitoring results and those of the professional bodies show audit quality in the UK is improving. In 2015/16 the FRC assessed 77% of FTSE 350 audits it reviewed as requiring no more than limited improvements. The FRC considers that at least 90% of FTSE 350 audits should fall into that category by the end of its 2016/19 strategy.
- The large firms are beginning to improve the effectiveness and efficiency of audit through the transformative use of technology, which should prompt further competition on quality. This raises further concerns about smaller firms’ ability to compete, what the role is for the auditor and how regulators and standard setters will be able to keep up.