Respective Roles of Government, the FRC and the Accountancy Profession
Published: 25 September 2023
3 minute read
These are the respective roles of the Government and the FRC in relation to the regulation of statutory audit.
The Government
The legislative framework for audit regulation is set out in the following legislation:
- EU Regulation 537/2014 (the Audit Regulation). This relates to the regulation of audit of public interest entities and forms part of retained EU law under the EU (Withdrawal) Act 2019. As amended, it will continue to apply in the UK as domestic legislation.
- Part 42 of the Companies Act 2006 (‘the Act’), as amended. Schedule 10 of the Act sets out the detailed requirements for recognised supervisory bodies and Schedule 11 sets out the corresponding requirements for recognised qualifying bodies.
- The Statutory Auditor and Third Country Auditors Regulation 2016 (‘SATCAR 2016’) as amended which implements EU Directive 2014/56/EU.
With effect from 17 June 2016, the Government has designated the FRC as the Competent Authority with the ultimate responsibility for the performance and oversight of the audit regulation.
As a result of the UK’s withdrawal from the EU, references to arrangements with the EU, its institutions and those of Member States, to EU institutions, EU law and concepts under EU law are no longer workable in legislation implementing the Audit Directive. By means of Statutory Instruments Parliament has made amendments to the legislation that implements the Audit Directive and to the retained UK version of the Audit Regulation. It also grants powers previously held by the European Commission, to the Secretary of State and to the FRC. The Statutory Instruments also amend references to non-retained EU law, EU institutions and functions exercised by EU institutions contained in UK law so that those references instead refer to legislation, institutions and functions that are provided for in UK law.
The FRC
Under The Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc.) Order 2012, which replaced a previous delegation order, the Government delegated to the FRC most of the responsibilities and powers in Part 42 of the Companies Act 2006.
The delegated authority includes powers to make binding regulations in specific areas. See the FRC Regulations in force.
The principal responsibility is to oversee the regulation of auditors by the professional accountancy bodies. In particular the FRC is responsible for the recognition, supervision and de-recognition of those professional accountancy bodies responsible for supervising the work of auditors and/or offering an audit qualification.
The relationship between the FRC and the professional bodies has changed. Prior to 17 June 2016, the FRC was responsible for the recognition and oversight of the accountancy bodies which were in turn responsible for supervising the work of auditors (Recognised Supervisory Bodies (‘RSBs’)) and offering audit qualification (Recognised Qualifying Bodies (‘RQBs’)).
This meant that the RSBs monitored the quality of the audit work and operated procedures for registration of statutory auditors and audit firms, maintaining of competence and disciplining of auditors. The FRC carried out oversight visits to these RSBs to assess the effectiveness of such arrangements and reported back to the Secretary of State. The FRC also provided independent monitoring of major audits as well as independent disciplinary arrangements in public interest cases.
As the Competent Authority with the ultimate responsibility for audit regulation pursuant to SATCAR 2016 and the Secretary of State Direction made on 17 June 2016, the FRC delegates to the RSBs certain of the Regulatory Tasks where it is satisfied that these bodies meet the criteria set out in Schedule 10 of the Act, as amended. The FRC cannot by law delegate Regulatory Tasks pertaining to public interest entities (‘PIEs’)
Specific Regulatory Tasks the FRC has delegated to the RSBs are as follows:
- Registration
- Audit Monitoring (non-PIE)
- Continuing Professional Development (‘CPD’)
- Enforcement (non-PIE)
The FRC can recall Regulatory Tasks from a RSB where it considers it appropriate, or where those cases or class of cases raise issues which have the potential to affect the public interest in the UK.
The FRC’s Professional Bodies Supervision team monitors the manner and extent to which the RSBs perform such delegated Regulatory Tasks in relation to those statutory audit firms and statutory auditors registered by the RSBs to perform statutory audit. The Delegation Agreements with the RSBs aim to promote the common aim of enhancing audit quality.
Professional Bodies Supervision also has to be satisfied that the recognition of each RSB should continue in light of the revised Schedule 10 of the Act and that each RSB complies with the requirements of its Delegation Agreement with the FRC.
FRC’s Information Gathering Powers
The FRC is designated as the Competent Authority under the Statutory Auditors and Third Country Auditors Regulations 2016 (SATCAR). As the Competent Authority, the FRC has various responsibilities (including those set out in regulation 3(1) of SATCAR, such as the public oversight of statutory auditors and the monitoring and investigation of statutory auditors and audit work). Although the FRC delegates certain functions to the Recognised Supervisory Bodies (RSBs), the FRC remains responsible for these functions.
Schedule 2 to SATCAR sets out the FRC’s investigation powers. Paragraph 1(1) provides that the FRC, as the Competent Authority, may for any purpose relating to inspecting or investigating statutory audit work give notice to any statutory auditor requiring them to provide information specified in the notice.
Schedule 10 to the Companies Act 2006 (in particular paragraph 13) requires RSBs to include in their rules certain requirements and arrangements relating to the monitoring of statutory audits carried out by its members. These requirements are set out in the RSBs’ Audit Regulations/Rulebook and Guidance and include the requirements that auditors co-operate with the FRC and its staff and comply with the monitoring arrangements of the FRC.