The quality of auditing of larger companies has improved after targeted work by the Financial Reporting Council (FRC) the regulator said. The FRC said the leadership of audit firms’ focus on, and investment in, improving audit quality, together with promoting a culture of continuous improvement, is beginning to pay off.
In the audit regulator’s second annual Developments in Audit report. the FRC set out evidence from its own and delegated audit quality reviews, thematic reviews and from audit committee and investor feedback. However, the picture is not consistent across all firms, market sectors and audit procedures.
The FRC noted that high profile accounting failures, as well as the results of audit monitoring, continue to highlight cases where auditors have not met expectations. Whilst there is evidence of greater professional scepticism, this is also the area where the FRC said it found the greatest number of issues.
Investor and public confidence in audit quality remain vulnerable where circumstances indicate a failure by auditors to be sufficiently independent or to provide a robust challenge, the FRC said. The regulator said it had enhanced its enforcement procedures and is working to improve the speed of action. The FRC has issued more than £14.2 million of sanctions on auditors and audit firms in 2016/17 and sets out the outcomes and lessons to be learnt from concluded investigations.
The report also includes an overview of the FRC’s work in setting auditing policy and standards, how the FRC is working to enhance the effectiveness of audit committees, its oversight of the profession, and its audit monitoring and enforcement activity. The FRC said that the audit market and confidence in it in the UK is changing significantly, with the impact of audit tendering and rotation requirements seeing greater competition on quality between the biggest firms.
Moving forward the FRC said it would focus on promoting scepticism through standards and practice; quality control standards; auditors adherence to the spirit as well as the latter of independence requirements; the impact of mandatory rotation on quality and fees as it is adopted across the market; harnessing technology; and the culture of the audit firms in support of audit quality.
The FRC was designated the Competent Authority for audit in the UK and established the regulatory framework for that role, following the implementation of the EU’s audit regulation and highlighted this work in its recently published annual report for 2016/17.
During the year the FRC also published its report Corporate Culture and the Role of The Board, issued revised technical actuarial standards and made improvements to resolve enforcement cases more quickly. Changes in the external environment led to the creation of stakeholder panels to help input to the debate on corporate governance and review the consequences of exiting the EU. The FRC has also announced a review of the UK’s corporate governance code.
Separately the FRC acts as secretariat to the Pre-Emption Group, which issues best practice documents regarding authorities to disapply pre-emption rights. The Group noted that the Prospectus Regulation came into force on 20 July, which introduced a new exemption from the obligation to publish a prospectus up to a 20% increase in securities admitted to trading.
In light of the new threshold, the Group confirmed that the Investment Association and the Pensions and Lifetime Savings Association continue to support the current overall limit of ten per cent in the 2015 Statement of Principles, which allows for two resolutions for disapplication authority – the first five per cent for general corporate purposes and, when applied for, the second five per cent for use only in connection with an acquisition or specified capital investment. No change to the flexibility permitted by the guidelines is expected as a consequence of the new Prospectus Regulation, the Group stated.Last Updated: 28 July 2017