The UK’s Financial Reporting Council (FRC) is looking to improve audit committee reporting in respect of company disclosures in annual reports and how auditors report information to audit committees, Melanie McLaren, executive director, audit and actuarial regulation division said in her speech at the regulator’s recent Developments in Audit conference.

She said the FRC had launched a pilot project on audit committee reporting through its new audit & assurance lab, which uses a similar approach to the existing financial reporting lab. The is focused on audit-related matters and brings together audit committee members, companies, investors and audit firms.

McLaren explained that the first phase of the project would look at the external reporting by audit committees in the annual report and accounts across the listed market. She said that investors have told the FRC that although there have been improvements in audit committee reporting, there is more that could be done in terms of making reporting more specific and therefore less boilerplate. In the second phase of the project, which will take place next year, the FRC said it would look at the reporting by auditors to audit committees,
or those charged with governance, in respect of the audit of the financial statements. These include independence and such
aspects as significant matters arising during the audit.

Next spring the FRC would also be publishing a thematic review on audit firm culture, McLaren said. She said that this would assess what action audit firms are currently taking to shape their culture with a particular focus on the promotion of high audit quality – underpinning consistency of audit execution.

 

Speaking at the same conference, FRC chief executive Stephen Haddrill said that audit failure played a part in the 2008 financial crisis. He said: “The seeds of failure in the crisis lie in the lack of robustness in tackling risk in 2006 and 2007, as much as in the errors of
judgement of 2008. With hindsight, neither the banks, their internal risk managers, directors, financial regulators, nor the
audit profession exercised the level of scepticism needed in this earlier period.”

However, he said that with audit committees, auditors and the FRC working together, reinforced by transparency to each other and investors, he thought there had been a sea change in effective consideration of risk and in that feeding into audit. However, he admitted that there was still room for improvement in both reporting and audit.

Looking at developments in the future he said the FRC was working with international standard setters and other regulators to bring the voice of investors and regulators more strongly into their deliberations, and hoped that this would prove a good basis for them to address future strategic challenges in the future.

SEC approves PCAOB’s new auditor’s reporting standard

The US Securities and Exchange Commission has approved a new auditor’s reporting standard proposed by the Public Company Accounting Oversight Board (PCAOB). In a statement the SEC chair Jay Clayton said the rule would require significant improvement to audit reports including the communication of critical audit matters (CAMs) and the disclosure of auditor tenure.

The PCAOB began consultation on improvements to the auditor’s report following comments from investors that it should provide more specific information about how the auditor reached his or her opinion.

Clayton said: “I strongly support the objective of the rule to provide investors with meaningful insights into the audit from the auditor. CAMs are designed to provide investors and other financial statement users with the auditor’s perspective on matters discussed with the audit committee that relate to material accounts or disclosures and involved especially challenging, subjective, or complex auditor judgment. Investors will benefit from understanding more about how auditors view these matters.”

 

Last Updated: 30 October 2017