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FRC notes evidence of improving audit quality and a commitment to continuous improvement
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, particularly for audits of larger companies where the Financial Reporting Council (FRC) has targeted improvement.
In the audit regulator’s second annual Developments in Audit report issued today, the FRC sets 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. 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 finds the greatest number of issues.
Setting out what is being done to drive improvements to audit quality, the report 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 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. Greater transparency of audit has been achieved through extended reporting, now being rolled out for more audits. Broadened perspectives on audit quality through the challenge and support of independent non-executives at the larger audit firms ensure a focus on sustained improvement.
Investor and public confidence in audit quality remains vulnerable where circumstances indicate a failure by auditors to be sufficiently independent or to provide robust challenge. The FRC has 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.
Moving forward the FRC will 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.
Melanie McLaren, FRC’s Executive Director for Audit and Actuarial Regulation, said,
“In our monitoring of audit quality we have yet to see overwhelming evidence of improvement in all sections of the market or the consistency of performance we want between different firms. Firms are though investing in improvement measures, and those Audit Committees surveyed report that they are seeing evidence of good quality audit.
Firms are focused on areas including their leadership, governance and culture, better use of technology and quality management systems.
This year we will focus on how we can enhance the speed and effectiveness of our enforcement role underpinning justifiable confidence in audit.”
Notes to editors:
- The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. 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.
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