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The Financial Reporting Council’s report on its oversight of the professional bodies during 2023/24

Financial Reporting Council Limited The Financial Reporting Council's report on its supervision of the professional bodies during 2023/24

Presented to the Parliament pursuant to section 1252(10) of, and paragraph 10(3) of Schedule 13 to, the Companies Act 2006.

To be printed on 12 November 2024. Company number 02486368

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1. Foreword by Executive Director of Supervision

High-quality financial reporting, audit and actuarial services give businesses of all sizes access to capital they need to grow, and ensures stakeholders – including investors, employees, pension holders and the public – can trust financial statements.

There are more than 4,300 audit firms registered in the UK that are responsible for audits of businesses of different size and structure. These firms are regulated by the professional bodies, supervised by the Financial Reporting Council (FRC). In addition, there are 18,000 actuaries in the UK and Northern Ireland who support the work of auditors and those who prepare of financial statements.

Headshot of a smiling woman with brown hair, wearing a green blouse and pearl earrings. Sarah Rapson Executive Director of Supervision

Our supervisory approach for professional bodies significantly evolved during 2023. Now more closely aligned to the model used with the largest audit firms, it is designed to develop a fair, evidence-based and comprehensive view of the professional bodies we supervise. We remain satisfied that the RSBs and RQBs continue to meet the conditions for recognition and the IFoA has regulated its members effectively. We have, however, recommended or required each body to make improvements to address the identified risks.

We found that the Association of Chartered Certified Accountants (ACCA) and the Institute of Chartered Accountants in Ireland (ICAI) had not met statutory obligations to inspect all registered auditors within six years, risking audit quality going unchecked for an unacceptable length of time which is not in the public interest. We also found instances of insufficient challenge of auditors on five of eight audit file inspections by Institute of Chartered Accountants in England and Wales (ICAEW). While these did not impact the file grade awarded, it indicates a lower level of robustness in both the inspection activity and the messaging to the firm. ACCA and ICAI have been reminded of the importance in ensuring this statutory cycle is met, and we require ICAEW to update the Audit Visit Manual, to ensure the robust and consistent challenge of audit firms.

The UK's audit market requires a pipeline of talented future auditors who are committed to serve the public interest. To support this, our future supervision activities will prioritise working with professional bodies to improve the qualifications, skills and training of auditors. We believe a collaborative, system-wide approach is needed to address capacity and capability at all levels of the UK audit market and to support the long-term success of the profession.

In the right circumstances, private capital investment can have the potential to enhance audit quality and drive innovation, choice and growth in the sector. However, maintaining trust in the industry requires professional bodies as well as firms to balance these opportunities with possible risks to independence and the public interest. In addition, we are working with professional bodies to understand the potential risks and opportunities of new technologies such as artificial intelligence (Al) and machine learning, and cybersecurity as well as maintaining the integrity of the qualification. As a regulator we remain committed to identifying developments in the market that can support choice of and access to audit for businesses across the country.

2. Introduction and conclusions

This is the FRC's 2024 report to the Secretary of State for Business and Trade on how it has discharged the powers and responsibilities delegated to it under the Companies Act 2006 (the Act) on the supervision of the professional bodies. The Act requires the FRC to report annually to the Secretary of State on the discharge of these delegated powers and responsibilities.

This report sets out the FRC's findings on matters relevant to the performance of the professional audit and actuarial bodies and highlights the key themes impacting them.

Much of our responsibility in respect of UK statutory auditors and audit firms in the non-PIE market is delegated to the four recognised supervisory bodies (RSBs). Their responsibilities and requirements are set out in Delegation Agreements agreed with the FRC.

The education and training of future auditors rests with the bodies the FRC has designated as recognised qualifying bodies (RQBs). The FRC also supervises how the Institute and Faculty of Actuaries (IFoA) regulates its members and the public interest regulatory element of its examinations and admissions framework.

Our supervision of these bodies enables us to judge whether they are operating in a manner that enhances audit quality, supports the resilience of the audit market, and effectively performs the regulatory activities for which, as competent authority, the FRC is ultimately responsible. Through our supervision of the IFoA, we assessed its integrity, competence, and transparency, in addition to its supervision of the quality of actuarial work.

Based on our statutory and non-statutory supervision in 2023/24, our principal conclusions were:

All RSBs and RQBs continue to meet the recognition criteria in Schedules 10 and 11 of the Act.
All RSBs are substantially complying with the terms and conditions of the Delegation Agreements.
We are satisfied that IFoA has implemented its regulatory framework sufficiently and is keeping this framework under review to ensure it continues to be fit for purpose.
None of the complaints we reviewed raised issues of substantive mishandling by any of the professional bodies.

While we are satisfied that the recognitions of the bodies should continue, we have nevertheless made requirements and recommendations for each body where we consider that improvements are still needed. Requirements should be implemented within 12 months and recommendations within three years unless we have agreed a different timescale. The suitability and effectiveness of the implementation is assessed in subsequent years' supervision work. Requirements are only made to RSBs that are not fully meeting the terms of their Delegation Agreement.

A list of the requirements and significant recommendations for each body can be found in Appendix 2 at the end of this report.

Professional bodies that we supervise:

Association of Chartered Certified Accountants (ACCA)
Association of International Accountants (AIA)
Chartered Institute of Public Finance and Accountancy (CIPFA)
Institute and Faculty of Actuaries (IFoA)
Institute of Chartered Accountants in England and Wales (ICAEW)
Institute of Chartered Accountants in Ireland (ICAI)
Institute of Chartered Accountants of Scotland (ICAS)

3. Key themes impacting professional bodies

Future of the audit profession

The UK audit profession provides vital services to businesses of all sectors and sizes in the economy and offers respected employment opportunities across all regions of the country, further contributing to economic stability and growth.

The global profession faces a talent challenge. In the UK the number of registered audit firms and Responsible Individuals continues to decline year on year, and the number of registered local audit firms and Key Audit Partners remains static. Meanwhile there is a growing need for auditors who possess both technical accounting skills and expertise in new technologies to match the growing demand for audit, including in areas that are outside statutory audit.

Addressing the impact of the talent challenge requires a collaborative, system-wide approach. The professional bodies play a key role in addressing the capacity challenges present at all levels of the audit market, ensuring that businesses and local bodies are able to access auditors.

Both the FRC and the professional bodies are committed to ensuring the audit profession remains viable, both now and in the future. In 2023, we commissioned research to look at both the PIE and non-PIE markets, to gain a better understanding of the reasons for entry, growth and the exit of firms in these categories.

We have worked closely with the professional bodies to understand how they are promoting and embedding a culture of learning so that prospective and qualifying auditors receive a challenging but enjoyable educational experience, which embeds the core traits that will guide the next generation of our profession.

From our regular engagement, we know the professional accounting bodies are committed to attracting new talent into the profession and maintain high auditing standards. They have demonstrated this by improving their educational resources and support and working with their registered firms to meet the challenges of a multi-generational workforce.

We have proactively engaged with the largest firms to assess their work in attracting talent and maintaining high auditing standards. This activity is vital to make sure they create an environment where all colleagues are supported and understand the importance of their work.

We expect audit firms to prioritise strategies that better support their people in maintaining a healthy work-life balance, while enabling a mindset of professional scepticism and challenge supported by high quality training and resources.

Extending the UK's global reach has also been a priority for us. This year, we approved the qualifications of Australia, Switzerland and New Zealand under s1221 of the Act. We then entered into a Mutual Recognition Agreement with Switzerland and Memoranda of Understanding of Reciprocal Arrangements with Australia and New Zealand to enable auditors who have obtained a professional audit qualification in these jurisdictions to gain audit rights in the UK and vice versa.

Control and ownership

We will continue to encourage professional bodies to increase capacity and capability and to promote auditing as a respected and valued profession at the heart of British business.

Maintaining trust in the audit profession is crucial due to its role in ensuring financial transparency for businesses, which in turn provides them with the necessary access to capital for growth.

Audit qualified individuals must be able to direct the overall policy or alter the constitution of a firm to ensure that decisions are made by those with the appropriate expertise and understanding of the profession's complexities. These individuals possess the necessary knowledge of auditing standards, ethical guidelines, and regulatory requirements, enabling them to make informed decisions that uphold the quality and integrity of the firm's audit services.

The ownership structure of statutory audit firms must be able to maintain and enhance the important public interest dimension of audit. Auditors are bound by strict ethical standards and so should not be influenced by non-audit interests or conflicts of interest. Their firm's structure should ensure that their primary focus remains on delivering high quality audit services without being compromised by external pressures or commercial interests. At the end of 2022, the FRC updated its Eligibility Criteria to add guidance to the interpretation of 'majority' as set out in paragraphs 6(b) and (c), namely that:

"Majority” means more than 50% of the voting rights, or of such rights under the firm's constitution as enable direction of its overall policy or alteration of its constitution, unless the firm's constitution specifies a higher percentage of those rights is required for decision-making, in which case, “majority” shall be taken to mean that specified percentage or more.”

The ICAEW subsequently notified the FRC that there were a small number of firms that had identified their constitutions did not fully meet the requirements of the Eligibility Criteria.

The FRC worked with all RSBs to understand the scale of the potential non-compliance. It was determined that the issue impacts only a small number of firms and instructions were made to these firms to resolve the non-compliance. The RSBs also carried out a communications exercise to remind all audit firms of the Eligibility Criteria requirements. On 1 October 2024, the ICAEW, ICAI and ICAS updated the Audit Regulations and Guidance to provide clarity and guidance on these sections to ensure firms are clear on their responsibilities and comply with the Eligibility Criteria.

The control and ownership of UK audit firms has also seen a growing trend of private capital (PC) investment over the past two years. We recognise that PC investment could, in the right circumstances, have the potential to enhance audit quality and drive innovation, choice and growth in the sector. However, it is essential that any possible risks are managed including protecting independence required by law.

Technological advancement

The RSBs have received several applications and queries relating to both new firms and existing firms seeking to restructure to use PC investment. We have engaged with the RSBs on this and are reassured that they are taking the necessary steps to ensure all new and existing firms continue to meet the Eligibility Criteria, particularly ensuring that Audit Qualified individuals retain control over decision making. The RSBs are confident that their own decision-making processes when determining eligibility have been sufficiently robust.

We were also pleased to note the RSBs' commitment to reminding firms about the importance of contingency planning to mitigate the impact of the potential loss of PC investment in the future. We expect this issue to continue to pose challenges and opportunities to the RSBs as well as the wider profession, so our supervision will continue to emphasise the need to remain responsive to changes in audit firm ownership structures.

New technologies are profoundly transforming the audit, accountancy and actuarial landscapes. AI and machine learning are the most commonly thought of and high-profile areas of advancement, but the rapid enhancement of several new and varied technologies, including those in advanced analytics, task automation, cloud computing and blockchain, have already had a sizeable impact on the profession by providing opportunities to enhance efficiency, accuracy and scope.

With technological disruption comes a series of risks and opportunities that can impact firms and the profession in different ways. Some examples of the risks are:

Cybersecurity: Do firms have sufficient measures in place to protect themselves against attacks and data breaches?
Sufficient understanding: Do auditors have sufficient understanding of the technology being used and are they receiving sufficient training?
Over-reliance: The risk that firms become dependent on their technology at the risk of professional scepticism.
Qualification integrity: Can institutions ensure they have robust mechanisms to detect potential cheating in coursework and examinations?

The FRC is working with professional bodies to support a deeper understanding of the risks posed by new technologies and we are taking a proportionate approach when considering policy options.

4. Our supervision of the professional bodies

Our wider supervisory activity provides a holistic view of the professional bodies' ability to deliver high quality outcomes.

The accounting, audit and actuarial professions are a vital component of the financial health of our economy. They help to ensure financial integrity and transparency, bolster investor confidence, enhance economic stability and competition, and support fraud prevention and regulatory compliance.

Together, the professions combine to create a robust framework for financial governance and risk management, which provides transparency, reliability, and accountability in financial reporting and risk assessment. This framework is established and supervised by the FRC in its role as Competent Authority for audit and the independent regulator for corporate reporting and governance in the UK. The FRC also conducts a non-statutory role in ensuring the regulation of actuaries and accountants remains proportionate and effective.

We have evolved our supervision approach of the professional bodies to more closely mirror our approach to the largest firms, focusing on assessing risks and anticipating future challenges.

Our primary objective is to ensure that professional bodies are held accountable for their actions while also promoting good practice to enhance the sector's overall performance.

We engage with senior leadership and independent non-executives at the professional bodies to communicate our assessment of actions they should prioritise to promote audit/ actuarial quality and resilience in the market.

We have strengthened collaborative ties by engaging more with senior leadership at the professional bodies and sharing good practice to continue to enhance quality. The professional bodies have responded well to this.

We have already seen the benefits of our new approach, which include being able to assess the decision making and risk management arrangements at the professional bodies which impact their performance.

For the majority of the professional bodies we supervise, the FRC is not their only regulator. We therefore recognise that collaboration and co-ordination with other regulators is important. This ensures our supervision is proportionate and does not place unnecessary burden on the professional bodies by duplication or other inefficiencies that a multiple regulator environment may introduce.

We continue to mature our supervisory approach by becoming increasingly assertive and proportionate and developing our role as an improvement regulator – focusing on promoting innovation and enhancing the quality of audit services and practices by identifying and sharing good practice, monitoring compliance, and encouraging continuous improvement – bringing the four faces of regulation (see overleaf) to life.

The Four Faces of regulation

This diagram illustrates the four faces of regulation, arranged in a diamond shape with "The Four Faces" in the center. Each corner of the diamond represents a face with its description:

System Partner Educating, collaborating, and supporting continuous improvement
Supervisor Supervision and monitoring of requirements, culture and behaviours
Facilitator Encouraging good practice through structured engagement
Enforcer Investigating conduct and applying proportionate sanctions and directions

Our supervision activities take a risk-based, holistic view of each professional body. We consider the membership journey from student through to conclusion of full membership, and each RSB's approach to the supervision of firms and governance of its audit regulatory functions.

Professional body

Each year we:

Complete our engagement framework of regular meetings with senior stakeholders at the professional body.
Review the governance arrangements in place at the professional body.
Conduct thematic reviews.

This year, our thematic review focused on the risk management arrangements in place at the professional bodies.

Registered firm

We oversee the RSBs' supervision of audit firms in respect of their registration as statutory auditors, the monitoring of the audit quality delivered, plus discipline and enforcement as they apply to firms.

Authorised individual

In respect of full members of an RSB, our oversight activities include the awarding of Responsible Individual (RI) status and reviewing Continuing Professional Development (CPD), together with discipline and enforcement procedures.

Student member

We supervise the RQBs in three main areas:

Registering students and tracking their progress.
Administering examinations, including granting exemptions.
Ensuring appropriate practical training is given to students.

5. Supervision of RSBs and RQBs

Over the following pages we will work through the four elements of the Supervision model; student members, authorised individuals, registered firms and the professional body to explain our approach for each and the key findings from our work in 2023/24.

5.1 Student member

Our approach:

For this year's RQB supervision work for student members, we focused on the prevention and detection of cheating, the Course of Theoretical Instruction (COTI) and shadowed authorised training visits.

Key findings:

Prevention and detection of cheating

Rapid technological innovation has made it easier for individuals who may seek to cheat or plagiarise during the assessment phases of their audit qualification, which in turn increases the risk of it occurring.

There have been several high-profile instances of cheating recorded in recent years which have predominantly occurred outside of the UK. We continue to assess all RQBs to ensure their processes for preventing and detecting cheating are robust.

Our review's purpose was to ascertain whether adequate processes are in place to prevent and detect cheating in non-invigilated assessments and whether there is adequate governance of cases of potential malpractice.

We were pleased to note that all the RQBs had comprehensive and clear policies in place, supported by other stakeholders to reduce the risk of cheating taking place They have established governance processes to deal with potential cases of malpractice, which, in the main, we found to be well-documented, consistently applied, and proportionate.

Promoting a learning culture

We shadowed authorised training officer/employer visits with the RQBs to ensure that they obtained sufficient evidence to support their set training requirements. We also assessed whether the visits adequately considered the hybrid working environment at the firms. We are keen for all RQBs to consider the learning culture experienced by the trainees and will carry out work in 2024 to assess this.

Course of Theoretical Instruction

The purpose of our review was to ensure that the RQBs have effective procedures to deliver their COTI. We assessed their learning materials to ensure the prescribed subjects were appropriately covered and reviewed examples of their learning materials. We also reviewed each RQB's approach to the delivery of tuition. We found good controls over the quality of tuition and risks with the external delivery of tuition, appropriately identified, and monitored. No significant issues were noted.

Across all areas above, we considered the bodies' quality assurance arrangements to be sufficient with good levels of documentation.

Sustainability

The FRC is committed to ensuring sustainability remains a key part in the education and training of the next generation of auditors. On 1 November 2023, we hosted a conference with the British Accounting and Finance Association, with the aim of embedding sustainability into audit and accountancy education.

The conference engendered a meaningful debate between regulators, RQBs, academics and training providers to help create a tangible change in the education of auditors and accountants.

Employees from all RQBs engaged in the debate and participated on a panel during the conference. In 2024/25, we will continue to develop this with the RQBs by looking to develop common materials.

The consensus is that academics, training providers and professional bodies must collaborate to embed sustainability in accounting education.

Chart: Total number of students registered with each RQB in UK and ROI 2021-2023

This chart displays the number of students registered with various Recognized Qualifying Bodies (RQBs) in the UK and Republic of Ireland for the years 2021, 2022, and 2023. The data is presented in a grouped bar chart format, with distinct bars for each year per RQB. The RQB categories are ACCA, AIA, CIPFA, ICAEW, ICAI, and ICAS.

	ACCA	AIA	CIPFA	ICAEW	ICAI	ICAS
2021	75,188	144	2,116	25,014	7,662	4,112
2022	71,449	143	2,100	26,134	7,767	4,081
2013	72,370	144	1,937	28,348	7,867	3,916

5.2 Authorised individual

Our approach:

To assess the RSBs' registration procedures for individuals, we reviewed decisions made by the relevant registration committees and followed up on the previous year's recommendations and requirements. For CPD, we selected samples of declarations made within a set period to consider the bodies' reviews and actions taken. We also tested the effectiveness of the RSBs' enforcement processes and procedures by reviewing a sample of enforcement investigations closed in 2023.

Key findings:

Improvements to CPD processes

CPD is crucial for auditors to maintain their professional competence and expertise. The audit profession requires auditors to stay current with evolving standards, regulations and good practices. CPD ensures auditors are continually enhancing their knowledge and skills, which is essential for providing high-quality and accurate audit services.
CPD helps auditors adapt to changes in regulations and technological advancements. The audit field is dynamic and the introduction of new technologies such as data analytics and AI is already having a profound effect.
CPD also reinforces the ethical standards and professional reputation of auditors. Continuous learning reminds auditors of their ethical responsibilities, such as maintaining independence, objectivity, and integrity, which are fundamental to secure public trust in the audit profession.
Over the last few years, we have pushed the professional bodies to improve their CPD processes and have several requirements to strengthen this area.

We are pleased to note that improvements have been made across all RSBs.

The ICAEW has made several changes to its processes to enhance communication with individuals and with internal departments to ensure relevant information and risks can be assessed and acted on accordingly.

ICAS has introduced new procedures to review the firmwide arrangements for CPD. From our shadowing we found the procedures to be comprehensive.

In 2023, ICAI implemented Irish Auditing and Accounting Supervisory Authority's new CPD guidelines and, from our review, we found the initial monitoring under the new CPD scheme to be effective, with attention being given to the size of the firm and client specialisms.

At the ACCA, we were pleased to close a recommendation after it implemented an improved process for removing a Practising Certificate and Audit Qualification (PCAQ) where an individual fails to make a CPD declaration.

However, from further testing, a recommendation was made around their CPD monitoring processes.

5.3 Registered firm

Our approach:

To assess firm registration processes, we held quarterly meetings with each body and reviewed the minutes from each Authorisation Committee. We shadowed a selection of each body's quality monitoring visits, considered the disciplinary rules, guidance and policies, and carried out file reviews on closed enforcement cases.

Key findings:

Continuous improvement in the monitoring functions

We have been pleased to note that across all RSBs we have identified improvements in areas such as documentation, resourcing and training for the audit monitoring teams. We were able to close two requirements each at ICAEW, ACCA and ICAI after being satisfied they had been implemented to the necessary standard.

At ICAS we observed significant improvements in the areas where we made three requirements in 2022. These included grading and improving and updating monitoring documentation procedures. They are on track to be closed in 2024.

We were also pleased to see collaboration between RSBs to assist each other in carrying out inspections where resource issues arose.

However, our work this year also highlighted further areas for the RSBs to improve. As noted later in the report, both ACCA and ICAI failed to meet their statutory obligations to inspect all their registered auditors within six years.

We highlighted improvements that ACCA and ICAEW should make to their audit visit manuals, and recommended Ical should carry out more regular reviews of its monitoring checklists.

We continue to stress the importance of audit quality and ensure the RSBs' approach to monitoring is aligned to the FRC's to ensure a consistency in audit regulation in the UK.

Chart: Number of registered audit firms at each RSB 2021-2023

This chart displays the number of registered audit firms for each Recognized Supervisory Body (RSB) in the UK from 2021 to 2023. The data is presented in a grouped bar chart, showing the trend for ACCA, ICAEW, ICAI, and ICAS.

	ACCA	ICAEW	ICAI	ICAS
2021	1,541	2,457	604	143
2022	1,303	2,298	581	128
2023	1,239	2,137	545	117

Insufficient challenge of auditors

On five of eight ICAEW inspections we found instances of insufficient challenge of auditors' work. Examples include:

Management override of controls

In one inspection the extent of fraud consideration by the firm appeared to be a discussion with management, which was not commensurate with it being identified as a significant risk. In another inspection, the auditor's journals testing was limited to reviewing material journals on a random basis. We expected the ICAEW's Quality Assurance Department (QAD) to challenge the firm on the appropriateness and sufficiency of work performed to address the fraud risk in the first example, and the sufficiency of the journals testing in the second.

Sampling

During an inspection of a small firm, we saw inconsistencies in the audit firm's sampling approach and insufficient documentation of the reasons for varying sample sizes. QAD considered that the level of testing was adequate. We expected the firm to be challenged on this matter.

We require the ICAEW to update the Audit Visit Manual issued to its inspectors to ensure they robustly and consistently challenge audit firms. The ICAEW should provide further technical support to its inspectors regarding their approach to management override of controls and sampling. This would enable them to confidently identify when the work performed by a firm is not to the required standard.

We did not have concerns regarding the file or visit grades issued by ICAEW based on findings from these inspections. Our observations concern the robustness of inspection and messaging back to the firm.

Audit monitoring manual

In three reviews, we identified issues with the ACCA's assessment of non-audit service fee income. In these inspections the ACCA did not review a breakdown of audit and non-audit service income as we expect in line with the FRC's Revised Ethical Standard 2019. This increases the risk that threats to auditor independence are not identified and where applicable, the adequacy of mitigating safeguards are not reviewed.

ACCA will update its audit monitoring manual to include a section with guidance for Senior Compliance Officers to document their review of non-audit service fees.

Compliance with the statutory monitoring visit cycle

Appendix 3 of the Delegation Agreements between the FRC and RSBs requires the RSBs to inspect its registered auditors at least every six years for non-PIE audits. This is to ensure that the RSBs are regularly checking the quality of audit work carried out by the firms they register continues to meet the required standards.

In 2023, both ACCA and ICAI failed to meet this requirement. ACCA completed 17 reviews outside of the statutory cycle. Furthermore, the ACCA did not directly notify us of the breach as soon as it became aware, as required.

ICAI informed us that 58 visits were not started within the required six-year period. However, 55 of these visits were conducted within 12 months, by 31 December 2023, with the remaining three planned for 2024.

Both RSBs have been reminded of the importance of ensuring the statutory cycle is met and we made formal requirements to them to improve this.

Publishing regulatory and disciplinary outcomes

Publishing the names of firms and individuals subject to regulatory and/or disciplinary findings is crucial for maintaining transparency in the financial and corporate sectors. This transparency helps to uphold the integrity of markets by ensuring all stakeholders are aware of any breaches in compliance or unethical behaviour. This makes investors more likely to locate assets in the UK, boosting access to capital.

When investors see that regulatory bodies are actively monitoring and enforcing standards, they are more likely to trust the market and the firms operating within it. This trust is essential for the smooth functioning of financial markets, as it encourages investment and economic growth by reducing the perceived risks associated with corporate misbehaviour.

Making these names public empowers consumers, clients, and other stakeholders to make informed decisions. When stakeholders have access to information about regulatory breaches and disciplinary actions, they can better assess the credibility and reliability of firms and professionals they choose to engage with. This informed decision-making promotes a more trustworthy and ethical business environment, benefiting the economy.

Further, it discourages future misconduct by increasing the reputational risks for those involved, promoting a culture of accountability and ethical conduct.

During our work this year, we noted that the RSBs take an inconsistent approach to publishing outcomes from disciplinary or regulatory findings. We have stressed the importance of publishing the full details of these outcomes, including names (unless there are exceptional circumstances) and we expect to see a more consistent approach moving forward.

Climate risks

Climate-related risks continue to be one of the FRC's areas of focus for 2024/25. We expect all RSBs to evaluate whether auditors have considered key climate risks appropriately.

This will include inspecting each RSB's work programmes to review whether they include questions relating to climate-related risk and Task Force on Climate-related Financial Disclosures (TCFD) reporting.

We will focus on climate-related risks in 2024/25, working closely with RSBs to set our expectations.

International Standard on Quality Management (ISQM)

ISQM1 is a set of requirements established by the International Auditing and Assurance Standards Board aimed at enhancing the quality of audits and other assurance engagements.

ISQM1 replaces the previous standard and is part of a broader set of standards aimed at improving audit quality. These include ISQM2, which focuses on engagement quality reviews and ISA 220 (Revised), which focuses on quality management at the engagement level. The effective date for ISQM1 was 15 December 2022, by which time firms were required to design and implement their quality management systems in accordance with the new standard.

Each RSB encouraged firms to prepare well for the new standards by revising the manuals and checklists used by inspectors. During our visits in 2023/24, we were pleased to see the RSBs focusing on ISQM implementation and questioning the firms on their approach.

During 2024/25, we will focus on RSBs' inspections of firms' quality management systems under ISQM (UK) 1 and engagement quality reviews under ISQM (UK) 2.

Local audit

In the last year, CIPFA and ICAEW have shown their commitment to working with system partners to address the systemic challenges seen in the local audit to ensure timeliness issued are resolved.

These bodies have been closely involved in the Local Audit Liaison Committee which brings together senior stakeholders to agree whole system risks and corresponding mitigating activity.

ICAEW has published its own vision for local audit, hosted roundtables and published thought leadership articles. CIPFA also consulted on temporary measures to reduce reporting burdens to support the recovery of the local audit system, though these were not taken forward.

CIPFA and ICAEW should continue this work supporting cross-system efforts to restore timely financial reporting and audit, which is being led by the Ministry of Housing, Communities and Local Government (MHCLG) and the FRC as shadow system leader.

The priority should be to support the effective implementation of measures to clear the backlog following the announcement to Parliament by the Minister of Local Government and English Devolution, subsequent legislation and a revised Code of Audit Practice.

The significant and persistent backlog of incomplete audits in local government has meant that the ICAEW's QAD has had to reduce the number of its inspections to allow audit firms to focus resources on clearing the backlog. We shadowed one of QAD's inspections during the year. No major findings were raised with QAD.

A large proportion of recent financial and governance failures seen among a small number of local authorities are for local audits, which are not classified as major. As these audits fall into QAD's scope it will be increasingly important for ICAEW to be focused on risk when prioritising its inspections once the backlog in the publication of audited accounts of local bodies in England clears.

To support the resilience of the local audit market, we have encouraged the ICAEW to proactively engage with audit firms entering the local audit market to ensure their take on considerations are appropriate for the specific circumstances of the audits to be completed.

Register of Statutory Auditors

The Register of Statutory Auditors (the Register) contains a list of statutory audit firms and individuals that are authorised to sign statutory audits. The Register is managed by the RSBs, which are responsible for ensuring its accuracy.

In 2023, the ICAEW took responsibility for hosting the Register from ICAS and has carried out some initial development to improve its appearance and search functionality. We have worked closely with them to incorporate elements of the PIE Auditor Register and to update the information included on the 'Home' and 'About' pages. The PIE Auditor Register went live in December 2022 and the PIE Auditor Registration Regulations set additional requirements for registered audit firms and individuals wishing to audit PIEs.

The ICAEW also maintains the Local Audit register and we were pleased to note it is taking proactive steps to ensure the information contained on the register is accurate and up to date.

It is imperative that the accuracy of both registers is maintained to ensure transparency and accountability in the auditing profession by enabling stakeholders to identify and verify the qualifications and credentials of auditors carrying out statutory audits.

5.4 Professional body

Our approach:

We reviewed each body's policies and processes relating to governance structures and risk management practices. We also observed the operation of relevant committees and regulatory boards.

Key findings:

Risk management

As a central part of an organisation's strategic operations, risk management allows an organisation to identify and respond to its risks. This reduces both the probability of failure and the uncertainty of achieving the organisation's objectives.

We performed a thematic review of the risk management arrangements at all the professional bodies we supervise. We developed an assessment framework based on UK industry standards and guidelines for risk management, for example ISO 31000: 2018 Risk Management Guidelines. This focused on framework design, governance, risk culture, risk appetite, risk assessment and reporting.

The review's purpose was to assess each body's risk management arrangements, highlighting good practice and identifying improvement opportunities. In particular, the review aimed to:

Increase the FRC's knowledge and understanding of the information security frameworks and practices at each body.
Establish a baseline and relevant benchmarks against which professional bodies can be measured during future risk management arrangements reviews.
Identify and highlight good practices.
Identify gaps and weaknesses in professional bodies' approach to risk management with a view to encouraging the professional bodies to raise standards through continuous improvement.

As part of the exercise, we benchmarked each body and were able to provide feedback and share good practice. Examples of this related to areas such as overall framework design, governance and control assessments.

As such, we are content with the risk management processes implemented by the professional bodies. We will carry out future reviews on this area to ensure it remains competently and proactively managed.

Governance

We reviewed the operational effectiveness and decision making of each professional body's key governance entities responsible for audit regulation. This included reviewing the structure and documentation relating to relevant councils, committees and boards.

At ICAS we found that the terms of reference for each entity were clear in setting out decision-making processes. We were also pleased to note that there appears to be sufficient lay representation throughout the entities reviewed, in the form of Public Interest Members (PIMs) on the Council and lay members on the other boards. Lay members are a vital to bring diverse perspectives and real-world experience, promoting inclusivity and ensuring public interest is given necessary consideration in decision making. It is reassuring to see ICAS recognising this.

We are satisfied that the ACCA has a robust and transparent governance structure in relation to its audit regulatory activities. We will further test the ability of the ACCA Council and Regulatory Board to hold the executive to account by attending an ACCA Council meeting and a meeting of the ACCA's Regulatory Board in 2024.

During our governance review at ICAI we noted that three of the four members of the Professional Standards Board are due to retire in 2024. All four of the board members were on the same rotation cycle having been appointed in 2016, with the Chair exercising their right to extend their tenure for a further two years. A similar cycle was noted for the Audit Risk and Finance Board and Education, Training and Lifelong Learning Board.

Continuity within a board's composition and skill set will be improved by ensuring a staggered end to the rotation of members. All boards and committees must be adequately resourced with appropriately skilled personnel to deliver the delegated Regulatory Tasks.

ICAI explained that it has started to rectify the issue by seeking to ensure that future end dates of boards and committee members are staggered to avoid losing significant experience at the same time. This is an area we strongly encourage all the professional bodies to adequately prepare for.

Throughout 2023, we were pleased to see that at ICAEW progress has been made towards governance reform. Significantly, a new Independent Chair of the Board has been appointed and the creation of a skills and competencies framework has begun. Work continues to improve the performance of the ICAEW Regulatory Board.

On 30 July 2024, we held a pre-appointment meeting with the ICAEW's preferred candidate for the Chair of the ICAEW Regulatory Board, to explain our remit and provide feedback to the ICAEW. Their formal appointment was announced on 8 August 2024, and we look forward to building a positive relationship as they take on this important role.

We continue to stress the importance of considering the size and role of ICAEW's Council. Acting in an advisory capacity, we believe that the Council has a valuable purpose in harnessing the skills and expertise of the profession, but it should do so while ensuring fair representation of all interested parties and relevant communities.

At AIA there is a clear division of responsibilities between Council's roles and responsibilities, and that of the various committees; and the escalation paths for each committee to Council are also documented.

We noted that CIPFA does not publish agendas or minutes in respect of any of its Boards and Committees. This puts CIPFA out of step with its peers and reduces the transparency over the work it carries out in the public interest. CIPFA should publish the agendas for CIPFA Council, its Board and its Students and Members Board in a timely manner, with any confidential matters redacted, as appropriate.

6. Supervision of actuarial regulation

Our supervision approach:

The IFoA regulates over 32,000 members worldwide, overseeing their actuarial education at all stages of qualification and development throughout their careers.

IFoA sets examinations, CPD, professional codes and disciplinary standards for its members.

The FRC carries out the non-statutory supervision of actuarial regulation through a memorandum of understanding (MoU) with the IFoA. We discharge our supervision responsibilities, in consultation with the IFoA, based on the risk to public interest.

Our supervision activities are similar to those carried out for statutory audit. For actuarial supervision, we review the IFoA's governance, regulatory functions and the regulatory aspects of the examination and admissions framework. This enables us to draw a conclusion as to how it complies with the requirements of the MoU, ensuring the quality of its regulatory activities remain at the required standard.

We focus on three areas:

The pre-qualified member.
The qualified member plus affiliates.
The professional body.

Based on our 2023 supervision activities, we found no evidence that the IFoA's regulatory framework was not effectively implemented during 2023. We have made two recommendations to improve processes, which are detailed on the next page.

The pre-qualified member

This means anyone participating in any of the IFoA's exam processes, regardless of their IFoA membership status. This includes three main areas:

Setting standards through a rigorous curriculum.
Administering examinations and awarding exemptions.
Ensuring appropriate practical training is performed by pre-qualified members.

Key findings:

We considered the role of the Independent Examiner (IE) in the monitoring of the standard and quality of university programmes with exemption agreements. We found that the IE handbook clearly sets out the role and responsibilities of the IE.

We also reviewed IFoA's qualification syllabus and practical experience requirements to identify evidence of Environmental, Social and Governance (ESG) considerations.

ESG topics were identified mainly in the specialist principles modules, and we were informed that scenarios involving ESG issues are also used in certain core module examination questions where appropriate. IFoA informed us it has not yet incorporated ESG issues into its personal and professional development requirements.

The qualified member plus Affiliates

Our reference to the "qualified member plus Affiliates”, means IFoA memberships of Associate, Affiliate, Fellow and Certified Actuarial Analyst. Supervisory considerations will differ depending on the type of membership. This year we focused on reviewing:

The awarding of Practising Certificates (PCs).
The Continuous Professional Development (CPD) frameworks.
The assessment of the Quality Assurance Scheme (QAS).
Monitoring through the Actuarial Monitoring Scheme (AMS).
Enforcement action taken through the Disciplinary Scheme.

Key findings:

The qualified member plus Affiliates

On 1 December 2022, IFoA implemented a new PC scheme and handbook, introducing new requirements for individuals applying for a PC. We reviewed the end-to-end application and decision-making processes and made recommendations for IFoA to introduce a 'cold file' review process and ensure a clear rationale is included on each application file to document how the decision was reached. Overall, we were satisfied with its implementation.

We closed four prior-year recommendations, but one remains open relating to Quality Assurance Scheme (QAS) CPD. We will be monitoring the steps taken by the IFOA in 2024/25 to ensure QAS CPD requirements are equivalent to the standard CPD requirements, to close the recommendation.

The professional body

It is the responsibility of IFoA's leadership to manage the organisation effectively to ensure resilience and that its regulatory responsibilities are being met. As part of our supervision approach, we assess the effectiveness of, and the risk arising from, the IFoA's arrangements for governance and leadership, culture and conduct, risk management and resilience, and technology and regulatory relationships.

Key findings:

We are pleased with how IFoA has responded to our change to a supervision model. IFoA's leadership has been supportive of the change and has engaged with us constructively as the model has been embedded.

The year 2023, saw a new President and an interim CEO appointed, leading to other internal personnel changes at executive and senior management level.

We met IFoA's preferred candidate for the role of Chair of the IFoA Board. We found the meeting constructive and informative, and appreciated the IFoA's engagement in this process. We see our new pre-appointment process as a valuable means of establishing early positive relations with key regulatory appointments.

IFoA Council approved several changes to its governance arrangements. We considered the proposed changes in addition to reviewing the IFoA's overall governance and were satisfied with its approach.

We conducted a risk management thematic review and sought evidence that the IFoA was effectively managing its risks and therefore its organisational resilience. Our assessment of its risk management provided us with sufficient evidence that IFoA has an effective framework in place.

7. Supervision of accountancy

Overview

By agreement with the six chartered accountancy bodies, the FRC has a voluntary, non-statutory role for supervision of the professional accountancy bodies' regulation of their members beyond those that are statutory auditors.

Supervision of these professional bodies, except the Chartered Institute of Management Accountants (CIMA), is governed by an exchange of letters between the FRC and the Consultative Committee of Accountancy Bodies (CCAB), of which the six professional bodies are members.

Currently the FRC's oversight work specific to accountancy relates to handling complaints from individuals who are dissatisfied with the way in which a complaint made to one of the CCAB or CIMA has been handled. When such complaints are referred to the FRC, any ensuing review focuses on whether the body followed its own rules and procedures in its consideration of the complaint.

Where the FRC finds that a body has not followed its own procedures, it makes a recommendation to the body to address any failings.

Complaints made to us about the professional bodies come from a variety of stakeholders including students, members of the profession and members of the public.

Most complaints to relate to the qualifications process for students (i.e. examinations), the registration process for new firms and Responsible Individuals or enforcement action.

We are generally content with the bodies' approach to managing and resolving complaints and have only made one recommendation to a professional body in the last three years.

Chart: Total number of complaints received for all professional bodies 2021/22 to 2023/24

This bar chart illustrates the total number of complaints received by the professional bodies from 2021/22 to 2023/24. The data shows 44 complaints in 2021/22, 44 in 2022/23, and 40 in 2023/24.

	2021/22	2022/23	2023/24
Number of complaints received	44	44	40

Appendix 1: Our responsibilities

Statutory responsibilities

Statutory audit supervision

The FRC is the competent authority for statutory audit in the UK. Our responsibilities are set out in regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016.

The FRC's statutory responsibilities for the supervision of the regulations of statutory auditors are discharged by:

Supervising the regulation of statutory auditors by RSBs and the award of the statutory audit qualification by RQBs and assessing annually whether the recognised bodies continue to meet the requirements for recognition.
Assessing that each RSB carries out the Regulatory Tasks delegated to it by the FRC in accordance with the requirements of the Delegation Agreements between the FRC and the RSB. The tasks include the registration of audit firms and individuals, audit firm monitoring, CPD and enforcement.

The FRC has a graduated range of enforcement powers which it may use in cases where an RSB or RQB fails to meet its statutory responsibilities.

Non-statutory responsibilities

The following arrangements are undertaken on a voluntary basis:

Actuarial oversight

The FRC conducts supervision of the IFoA by voluntary agreement. Our oversight is facilitated by an MoU between the FRC and the IFoA, supplemented by a Communications Protocol.

We have aligned our supervision approach to the IFoA with that of the audit professional bodies to ensure consistency and so that we continue to hold it to the same high standards.

Accountancy oversight

Supervision of these professional bodies, except CIMA, is governed by an exchange of letters between the FRC and the CCAB, of which the six professional bodies are members. Currently, the FRC's supervision of accountancy is limited to assessing complaints about professional accountancy bodies.

Appendix 2: Open requirements and significant recommendations

Requirements: Are only made to an RSB when we consider it is not fully meeting the terms of a Delegation Agreement requirement.

Recommendations: Are actions we recommend to a professional body to improve its performance of a regulatory process or task. They are categorised as low, medium and high priority. We have only included those recommendations we consider to be high priority.

The authorised individual

Body	Year made	Type	Detail	Status
ACCA	2021	Recommendation	All materials used to train professional development people should be reviewed to ensure they are fit for purpose.	On track This recommendation should be implemented within three years of being made.
ACCA	2022	Recommendation	The ACCA should implement a process to periodically audit a selection of closed PCAQ and FAC application files to ensure the appropriate procedure has been followed and the correct decision has been made.	On track This recommendation should be implemented within three years of being made.
ACCA	2023	Recommendation	We recommend the ACCA places greater emphasis on using the IES8 form when monitoring the CPD of its PCAQ holders.	On track This recommendation should be implemented within three years of being made.
ICAEW	2020	Requirement	ICAEW must have effective procedures to carry out CPD compliance monitoring over all its RIs.	Overdue ICAEW has reviewed RI CPD as part of its audit monitoring visits to PIE audit firms since January 2022, but this has not included the whole firm procedures. ICAEW has informed us the whole firm element of this requirement will be addressed as part of new CPD monitoring. We expect this to be implemented in full next year.
ICAEW	---	Recommendation	ICAEW reviewers should complete the documentation of their CPD reviews in a clear and consistent manner to support the conclusions reached.	On track ICAEW's audit visit manual has been updated and we are content with the changes made. The updated procedures were used from visits starting from June 2023. We reviewed three QAD visits where the updated procedures were used, and we were satisfied with the procedures. We will conduct further reviews in 2024 to determine whether the recommendation can be closed.
ICAI	2022	Requirement	ICAI must update its procedures to include firmwide procedures and CPD compliance when carrying out monitoring, for example, reviewing a sample of PIE and non-PIE RIs at PIE audit firms.	On track We reviewed ICAI's audit manual which had been updated as requested. We will conduct a review to assess whether these changes are being used during monitoring visits in 2024 to determine whether the recommendation can be closed.

The registered firm

Body	Year made	Type	Detail	Status
ACCA	2020	Requirement	To meet the principles of the Delegation Agreement, ACCA should improve the quality and extent of evidence that senior compliance officers are required to record during monitoring visits.	Overdue This requirement should have been implemented within 12 months of being made and is now well overdue. We have told ACCA we expect significant improvements in 2024.
ACCA	2023	Requirement	The ACCA must prepare a plan and submit it to us by 30 September 2024 outlining how it will catch up with the six-year cycle inspections missed in 2023, while ensuring the six-year cycle review is met for firms due a visit in 2024.	On track This requirement should be implemented within 12 months.
ICAEW	2022	Requirement	Audit File Review Checklists should include the reasons areas of the audit file were selected for review, a record of the work inspected and judgements applied by the inspectors. These should be in sufficient detail that is proportionate to the size, nature and complexity of the audit files reviewed.	Overdue This requirement should have been implemented within 12 months of being made and is now overdue. We have told ICAEW we expect these changes to be made by the end of 2024.
ICAEW	2022	Requirement	During audit inspections, ICAEW should review all relevant elements of ISQC1/ISQM1.	Overdue This requirement should have been implemented within 12 months of being made and is now overdue. We have told ICAEW we expect these changes to be made by 2024.
ICAEW	2023	Requirement	ICAEW must update its Audit Visit Manual issued to inspectors by 30 June 2024 to ensure they robustly and consistently challenge audit firms.	On track This requirement should be implemented within 12 months of being made.
ICAI	2021	Requirement	We require the support provided to ICAI reviewers and management through internal training, checklists and accompanying guidance, and supervision and review to be enhanced. This is to ensure the absence of appropriate levels of professional scepticism applied and documented in the performance of an audit is robustly challenged as part of the ICAI monitoring process.	Overdue ICAI was provided with an extension to the 12-month implementation period as the files we reviewed in 2022 were completed by ICAI before the requirements were made. During the 2023/24 cycle we noted some improvements, but expect more to be made in 2024/25 to satisfy this requirement.
ICAI	2023	Requirement	ICAI is required to ensure all visits are carried out within the six-year statutory cycle. Where this is not possible, ICAI must report any exceptions and the reasons for non-compliance on a timely basis.	On track This requirement should be implemented within 12 months of being made.
ICAI	2023	Recommendation	When exercising discretion not to publish a firm or individual's name under Appendix 1 of ICAI's Publication Policy, ICAI's Quality Assurance Committee should set out detailed reasons for its decision in committee minutes, rather than merely stating that publication would be disproportionate.	On track This recommendation should be implemented within three years of being made.
ICAS	2022	Requirement	ICAS should improve the extent of its documentation of the audits it inspects. The documentation needs to be sufficient to enable a reviewer to understand and assess the scoping of the review, the extent of audit work performed by the firm, and ICAS's conclusions on the quality of the work, as well as judgements on file grades and outcomes.	On track ICAS was provided with an extension to the 12-month implementation period as the files we reviewed in 2023 were still ongoing at the time our report was completed. From the work we reviewed, we noted that ICAS had made several improvements.
ICAS	2022	Requirement	ICAS should update its procedures and the guidance issued to reviewers to ensure they robustly and consistently challenge the audit firm, and that deficiencies identified are appropriately reflected in ICAS's conclusions on compliance with the Audit Regulations and in the file and overall gradings.	On track ICAS was provided with an extension to the 12-month implementation period as the files we reviewed in 2023 were still ongoing at the time our report was completed. From the work we reviewed, we noted that ICAS had made several improvements.
ICAS	2022	Requirement	ICAS should review its approach to assessing compliance with the Audit Regulations to ensure matters of significance are properly considered in determining whether a breach has occurred. ICAS should also review its approach to determining overall visit grades, ensuring there is clear definition at the grade boundaries and that applicable guidance encourages effective consideration of all the factors present, to ensure the approach is applied consistently.	On track ICAS was provided with an extension to the 12-month implementation period as the files we reviewed in 2023 were still ongoing at the time our report was completed. From the work we reviewed, we noted that ICAS had made several improvements.

The professional body

Body	Year made	Type	Detail	Status
ICAI	2023	Recommendation	ICAI should review and update the terms of reference for its Examination Committees and should develop guidelines for its committees to ensure members are aware of their delegated powers in relation to sanctions.	On track This recommendation should be implemented within three years of being made.
ICAI	2023	Recommendation	Any potential misconduct cases should be presented to the Education Committees in a written pack, the pack should contain a summary of the evidence and any written or verbal engagement with the student. The pack of information should be provided to committee members ahead of the meeting to allow them sufficient time to review the case.	On track This recommendation should be implemented within three years of being made.

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