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Respective roles of Government, the FRC and the accountancy profession

This note summarises the respective roles of the Government and the FRC in relation to the regulation of statutory audit.
 

The Government

The legislative framework for audit regulation is set out in the following legislation:
  • EU Regulation 537/2014 (the Audit Regulation). This is automatically law in the UK and relates to the regulation of audit of public interest entities.
  • Part 42 of the Companies Act 2006 (‘the Act’), as amended. Schedule 10 of the Act sets out the detailed requirements for recognised supervisory bodies and Schedule 11 sets out the corresponding requirements for recognised qualifying bodies.
  • The Statutory Auditor and Third Country Auditors Regulation 2016 (‘SATCAR 2016’), which implements EU Directive 2014/56/EU.
 
With effect from 17 June 2016, the Government has designated the FRC as the Competent Authority with the ultimate responsibility for the performance and oversight of the audit regulation. The EU Regulation 537/2014 and EU Directive 2006/43/EC as amended by EU Directive 2014/56/EU and as implemented by SATCAR 2016, mandate the tasks that the FRC is responsible for.
 

The FRC

Under The Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc.) Order 2012, which replaced a previous delegation order, the Government has delegated to the FRC most of the responsibilities and powers in Part 42 of the Companies Act 2006.

The delegated authority includes powers to make binding regulations in specific areas. To see the FRC Regulations that are in force, please click here.

The principal responsibility is to oversee the regulation of auditors by the professional accountancy bodies. In particular the FRC is responsible for the recognition, supervision and de-recognition of those professional accountancy bodies responsible for supervising the work of auditors and/or offering an audit qualification.

The relationship between the FRC and the professional bodies has changed. Prior to 17 June 2016, the FRC was responsible for the recognition and oversight of the accountancy bodies which were in turn responsible for supervising the work of auditors (Recognised Supervisory Bodies (‘RSBs’)) and offering audit qualification (Recognised Qualifying Bodies (‘RQBs’)).   This meant that the RSBs monitored the quality of the audit work and operated procedures for registration of statutory auditors and audit firms, maintaining of competence and disciplining of auditors. The FRC carried out oversight visits to these RSBs to assess the effectiveness of such arrangements and reported back to the Secretary of State. The FRC also provided independent monitoring of major audits as well as independent disciplinary arrangements in public interest cases.

SATCAR 2016 brings changes to the formal relationship between the FRC as a regulator of statutory audit and the professional bodies whose members conduct statutory audits under the Act.  As the Competent Authority with the ultimate responsibility for audit regulation pursuant to SATCAR 2016 and the Secretary of State Direction [date], the FRC delegates to the RSBs certain of the Regulatory Tasks where it is satisfied that these bodies meet the criteria set out in Schedule 10 of the Act, as amended. The FRC cannot by law delegate Regulatory Tasks pertaining to public interest entities (‘PIEs’)
 
Specific Regulatory Tasks the FRC has delegated to the RSBs are as follows:
  • Registration
  • Audit Monitoring (non-PIE)
  • Continuing Professional Development (‘CPD’)
  • Enforcement (non-PIE)
The FRC can recall Regulatory Tasks from a RSB where it considers it appropriate, or  where those cases or class of cases raise issues which have the potential to affect the public interest in the UK. For Temporary Delegation Agreement click here. 
 
The FRC’s Professional Oversight team monitors the manner and extent to which the RSBs perform such delegated Regulatory Tasks in relation to those statutory audit firms and statutory auditors registered by the RSBs to perform statutory audit.  The Delegation Agreements with the RSBs aim to promote the common aim of enhancing audit quality.
 
Professional Oversight also has to be satisfied that the recognition of each RSB should continue in light of the revised Schedule 10 of the Act and that each RSB complies with the requirements of its Delegation Agreement with the FRC. 
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