High quality audit enhanced by stronger culture
News types: Codes and Standards Announcements
Published: 10 May 2018
It is important that firms create a culture where achieving high quality audit is valued and rewarded, and which emphasises the importance of ‘doing the right thing’ in the public interest according to a new report by the Financial Reporting Council (FRC), ‘ Audit Culture Thematic Review’ . The FRC considered how firms identify and pay attention to challenges in their culture and take action to address them to promote and sustain improvements in audit quality.
The report notes that firms are investing considerable time and effort on their firm-wide culture and identifies numerous examples of good practice among firms and highlights key areas that firms should address to enhance audit quality.
Key areas where firms should focus greater attention to establish, embed and promote an appropriate audit culture include:
- Giving additional prominence to audit specific behaviours and values within the firms’ cultural design, including the fundamental principles of integrity, objectivity, independence and professional scepticism that underpin high quality audit;
- Ensuring that all audit partners and staff appreciate that a good audit is of significant societal value and helps to underpin transparency and integrity in business;
- Balancing the firms’ robust processes to sanction poor quality work or behaviour with better recognition of positive contributions to high audit quality;
- Further developing the firms’ root cause analysis techniques to identify the behavioural or cultural factors that contributed to good and poor quality outcomes; and
- Improving the firms’ monitoring of how successful they are at embedding their desired culture, including the Independent Non Executives of the firms being more proactive when performing their assessment of the steps being taken by the firms to embed an appropriate culture.
The FRC encourages firms to provide more extensive and transparent public reporting on their culture to enhance engagement with stakeholders and to build confidence and trust.
This is the first time that the FRC has published a report on audit culture. Looking forward, the FRC plans to review the culture at the largest firms as part of its recently announced expanded monitoring and supervision of those firms, and encourage investors and other stakeholders to consider the link between culture and audit quality.
Melanie Hind, Executive Director of Audit and Actuarial Regulation at the FRC, said,
“There are many factors that influence the environment within which auditors make their decisions and act. Therefore, it is vitally important that firms create an audit culture where achieving high quality work is valued and rewarded, and which emphasises the importance of ‘doing the right thing’ in the public interest.
We found that firms have taken steps to achieving this. However, more should be done by firms to successfully promote and embed their desired culture, so that audit quality can be consistently and sustainably high.”
Notes to editors:
- The Financial Reporting Council’s (FRC) mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
- As the competent authority for audit in the UK, the FRC uses a variety of means to stimulate improvements in audit quality. These range from inspecting audits and, where appropriate, using our enforcement powers to hold auditors to account where audit failures have occurred, to performing thematic reviews (like this one) to compare, and provide transparency to, actions at different firms in relation to a particular topic. Thematic reviews provide an opportunity for shared learning by the firms and for the FRC to bring influence to bear on them.