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FRC notes evidence of improving audit quality

Jul 28, 2017
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, 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. While 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. Meanwhile, 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.
According to the FRC, 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.
The FRC will now focus on promoting scepticism through standards and practice; quality control standards; auditors’ adherence to the spirit as well as the letter 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, the 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,” she added. “This year, we will focus on how we can enhance the speed and effectiveness of our enforcement role underpinning justifiable confidence in audit.”
Source: Financial Reporting Council.