Regulation of Audit and of the Accountancy Profession

THE RESPECTIVE ROLES AND RESPONSIBILITIES OF THE GOVERNMENT, THE FRC AND THE ACCOUNTANCY PROFESSION IN RELATION TO REGULATION OF AUDIT AND OF THE ACCOUNTANCY PROFESSION

This note summarises the respective roles of the government, the FRC and the accountancy profession in relation to regulation of audit and the accountancy profession.

The Government

The Government is responsible for maintaining the legislative framework for audit regulation. In January 2003, the Government concluded that there should be a strengthening of the regulatory framework for corporate governance, auditing and financial reporting. The Companies (Audit, Inspection and Community Enterprise) Act 2004 provided the legislative underpinning for this structure. As a part of this, the Government delegated to the Professional Oversight Board from September 2005 most of the responsibilities and powers the Government had previously exercised directly to oversee and monitor the system of audit regulation.

More recently the Companies Act 2006 and the Statutory Auditors and Third Country Auditors Regulations 2007¹ make further changes to the statutory framework, in particular to give effect in the UK to the requirements of the Statutory Audit Directive (2006/43/EC). As a part of this framework there will a new delegation of powers and responsibilities to the POB, including powers to make binding regulations in specific areas. All these changes took effect from 6 April 2008. To see the Oversight Board Regulations please click here.

The FRC

The FRC’s regulatory responsibilities in relation to audit and to the accountancy profession are exercised by the Professional Oversight Board. The POB has three main roles in relation to audit and accountancy:

• a statutory obligation to oversee the regulation of auditors by the recognised accountancy bodies. In particular the POB is responsible for the recognition, supervision and de-recognition of those accountancy bodies responsible for supervising the work of auditors or offering an audit qualification;
• through its Audit Inspection Unit (AIU) to monitor, independently of the professional bodies, the quality of auditing of listed and other major public interest entities;
• in addition, by agreement with the principal accountancy bodies, to exercise independent oversight of the way in which the bodies carry out their own regulatory responsibilities in relation to their members, The bodies have agreed that they will:
  • consider carefully the POB recommendations, and either
  • implement them within a reasonable period, or
  • give reasons in writing for not doing so.

The accountancy profession

The professional accountancy bodies continue to have the primary regulatory responsibility for the supervision of their members acting in their professional capacity. In relation to audit, as recognised qualifying bodies, they must have effective arrangements in place to ensure that their audit qualifications meet the statutory requirements; and, as recognised supervisory bodies, they must have in place amongst other things effective arrangements for registration, monitoring and disciplining of auditors. As noted, monitoring of major public interest entities is carried out by the AIU and for other entities by the inspection unit of the recognised body.

¹SI 2007 No 3494