Audit Firm Monitoring Approach
As competent authority, the FRC now has responsibility for the regular monitoring and mitigation of risks in the audit market. These include the risks of systematic deficiencies within an audit firm network, which could lead to the demise of any audit firm, disruption in the provision of statutory audit services whether in a specific sector or across sectors, and the impact on the overall stability of the financial sector. The largest audit firms are systemically important institutions; issues in one part of the firm’s global network can affect the UK firm’s reputation.
In the 2018/19 plan and budget, the FRC included plans to develop and implement a new approach to the monitoring of the largest audit firms – the Big Six firms - which are core to the integrity and transparency of our capital markets. This monitoring approach will inform our supervision of the firms.
We will set out our expectations of each firm and seek evidence in five pillars:
- leadership and governance;
- values and behaviours;
- business models and financial soundness;
- risk management and control; and
- evidence on audit quality, including from our programme of audit quality reviews conducted by the AQR team.
We have already started work on monitoring risk reporting, contingency planning and IT security as part of the risk management and control pillar. We will summarise our findings across the firms in our annual reports on Developments in Audit and we will report privately to the individual firms on matters outside the programme of audit quality reviews, which will continue to be subject to public reporting.
As part of our focus on leadership and governance we will set out our expectations of the experience, skills and attributes of candidates for key roles such as Independent Non-Executives, Heads of Audit and Ethics partners at the Big Six firms. We will assess and feed back to senior management how well we believe their appointees meet these criteria. We do not have specific powers in this regard and will look for the firms’ cooperation in doing so. In order fully to implement our new approach we will ensure that we have staff with the necessary skills, knowledge and expertise.
The AFMA team will be led by the AFMA Director, once appointed. General enquiries should be directed, in the first instance, to Claire Lindridge.