FRC’s work to enhance justifiable confidence in audit
News types: Codes and Standards Announcements, Publications
Published: 28 April 2014
Audit is a key pillar of public confidence in the UK’s corporate governance and reporting. Since the financial crisis the FRC has introduced a number of measures designed to enhance audit quality and increase the value of auditor reporting to investors to underpin UK corporate activity. These measures include retendering, enhanced and extended auditor reporting, and directly informing audit committees of the results of the FRC’s audit quality inspections.
In the near to medium term, the FRC will focus on the expansion of its audit inspection work in line with recommendations from the Competition Commission, the implementation of the new EU Directive on statutory audit and enhancing the quality of bank audits, including through its thematic review of audits in this sector. It will also develop best practice guidance for audit committees on assessing audit quality; assess whether the ethical standards for audit remain fit for purpose; and review audit firm governance including whether the declining proportion of audit in the total business of the major audit firms poses unacceptable risk to audit quality and capacity.
Over the longer term, the FRC will assess whether any change to the scope of audit is necessary to meet investor expectations.
The above programme has been developed, in part, in response to a survey commissioned by the FRC, which benchmarked the views of key audit stakeholders undertaken in 2013.
Stephen Haddrill, FRC Chief Executive said,
“Audit is fundamental to good governance and reporting. The quality of audit in the UK is generally good but not always so and not always perceived as such. The many measures that have been and will shortly be introduced are designed to enhance audit quality and strengthen investor confidence.”
Benchmarking stakeholder confidence in audit
The stakeholder survey carried out last year and published today provides a new benchmark of confidence in audit and will be repeated in future to test the effectiveness of the FRC’s programme in meeting legitimate expectations. The survey shows:
- Confidence in the value of audit is correlated with the extent of day-to-day experience of audit – auditors and companies are generally confident in the value of audit.
- However, the largest proportion of stakeholders, and in particular many investors, call for more change including more transparency in auditor reporting and a more open and competitive appointment process to help improve their confidence in the independence of auditors and the transparency of their audit conclusions.
- Some of the concerns about independence and objectivity arise from the current concentration of the market in the hands of a few firms.
Notes to editors:
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The FRC’s 2014/15 plan and budget (PDF) is published.
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Agreed measures Collectively the agreed FRC and international measures and initiatives seek to:
- Enhance the transparency of audits – by requiring extended auditor reporting about the audit to enable public challenge and engagement about whether audit meets the legitimate needs of users (FRC auditor reporting measures and forthcoming EU and IAASB measures)
- Enhance the transparency of audit quality – by increasing the frequency and reporting of the FRC’s Audit Quality Review (AQR) work to enable more effective monitoring of these matters by audit committees
- Enhance the relevance to users of the auditor’s role – by placing the auditor more firmly at the heart of governance (in the context of enhanced board governance of risk management and enhanced corporate reporting outside the financial statements), requiring auditors to apply their knowledge in reviewing the enhanced annual reports and to speak out in the auditor’s report when this leads them to identify inconsistencies with their knowledge (FRC measures to enhance the role of the auditor in relation to the annual report)
- Manage auditor conflicts of commercial self-interest – by imposing further restrictions on the provision of non-audit services (EU measures)
- Address threats to audit quality from close auditor relationships with companies – by increasing the frequency of audit tendering (FRC, EU) and audit firm rotation (EU requirement) and further enhancing the role of the Audit Committee in managing the company’s relationship with the auditor (FRC, EU)
- Address public confidence in the audit of banks – through the generic measures outlined above and through additional scrutiny by relevant regulators including seeking to learn the lessons from supervisory enquiries since the financial crisis and establishing guidance on the balance between financial stability and transparency (UK Parliamentary Committee on Banking Standards, PRA Code, FRC banking supplement to draft guidance on risk management and going concern.)
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Ensuring effective implementation and integration In the next 12 to 18 months, the FRC intends to:
- Carry out a thematic review of UK bank audits – to focus on aspects of how bank and building society audits are conducted to identify why progress in improving their quality has been slow and what needs to be done to achieve necessary improvements
- Develop further guidance for audit committees – the guidance would address how audit quality and effectiveness might best be assessed by audit committees, with the objective of assisting effective implementation of the increased expectations of audit committees. This guidance will also cover how best to report on AQR’s inspections
- Review and update the UK Ethical Standards for Auditors - with the objective of both implementing agreed measures and reviewing where further measures may be needed. For example, auditor independence requirements need to be reviewed in the light of increased rotation and other aspects of the EU Directive.
- Review audit firm governance - The first review of the Audit Firm Governance Code will be carried out as planned and will be considered in the light of audit potentially becoming a less significant part of firm’s business models. FRC will look at proportionate methods of ensuring audit firms have the appropriate management structure and governance to effectively promote audit quality and to be assured of sufficient audit capacity to underpin UK corporate activity.
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Assessing remaining expectation gaps The FRC will then seek to learn more about stakeholders’ views about any remaining expectation gaps over the next three years. Examples of areas to be considered may include the auditor’s role in connection with narrative reporting and non-GAAP measures.
The FRC will also continue to consider the results of thematic reviews by the AQR team and whether there are implications for its standards or the prevailing mindset of auditors in relation to specific areas.
The FRC will also keep an eye to longer term thought leadership to promote ongoing improvements to audit quality and to lead the audit policy debate in the UK and internationally – for example, assessing whether the audit profession is developing the right people, drawing on the results of the ongoing ICAS/FRC sponsored research. This may lead to questioning whether the audit qualification remains fit for purpose. Another longer term thought leadership issue is whether auditing standards or firms’ methodologies may be too rigid and could be driving a compliance-based audit, restricting scope for more focus on auditor judgment and innovation. -
Stakeholders and consultation The FRC will work with stakeholders in the UK and internationally who have an interest in and/or influence over the UK audit framework, including policy makers and those that influence them.
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The FRC will engage with all stakeholders throughout the process, including holding roundtables and focus groups and conducting further targeted research as needed. Following this process, the FRC will consult on proposals for changes to aspects of standards and regulation within its responsibility and make recommendations to others when the relevant responsibility lies elsewhere.
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Stakeholder survey The YouGov benchmark survey can be found here (PDF).
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The FRC The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.