Audit Market Supervision (overview)
3 minute read
Background
Audit Market Supervision (AMS) takes a cross-firm and market-wide view of the factors that affect audit quality and the resilience of the UK PIE audit market. Its work includes inspecting firms’ Systems of Quality Management (SoQMs); assessing risk and resilience; overseeing governance, leadership and culture, including firms’ application of the Audit Firm Governance Code; and publishing comparable Audit Firm Metrics.
These activities are distinct but connected: evidence from each helps AMS identify risks within firms and across the market, assess whether firms are responding effectively through their SoQMs and determine where further supervisory or market-wide action may be needed.
Our AMS work is carried out under the four pillars as described below.
Audit Market Monitoring
Under Article 27 of the UK Audit Regulation, the FRC regularly monitors developments in the market for statutory audit services to PIEs. This includes assessing risks arising from a high incidence of audit quality deficiencies that could lead to firm failure or disruption in audit provision and market concentration and whether measures are needed to mitigate identified risks.
Our Audit Market Monitoring function brings together evidence from across the FRC and from external sources to identify emerging or growing risks to audit quality, resilience, capacity and competition. This may reveal a market-wide risk that firms need to consider within their SoQMs; patterns in firms’ SoQM assessments and inspection findings may, in turn, indicate a broader market issue. This two-way flow of evidence helps connect firm-level supervision with the FRC’s view of the market as a whole.
Inspection of Systems of Quality Management
ISQM (UK) 1 requires audit firms to design, implement and operate a System of Quality Management (SoQM) that is tailored to the nature and circumstances of the firm and the engagements it performs. The SoQM addresses governance and leadership, relevant ethical requirements, acceptance and continuance, engagement performance, resources, information and communication, and the firm’s monitoring and remediation process. ISQM (UK) 2 addresses engagement quality reviews as a specified response within that system.
For firms that carry out statutory audits of PIEs, our inspection work of a firm’s SoQM forms part of the FRC’s statutory audit quality assurance responsibilities under Article 26 of the UK Audit Regulation.
Our SoQM work assesses how firms identify and assess quality risks, design and implement responses, monitor whether the system is achieving its objectives and remediate identified deficiencies. It draws on relevant evidence from individual audit inspections and the wider supervisory work, including firms’ compliance with ethical and independence requirements of the UK Ethical Standard.
Governance, Leadership and Culture
Effective governance, leadership and culture are central to firms’ ability to deliver consistently high-quality audits and remain resilient. The decisions, priorities and behaviours set at the top of a firm shape how the audit practice is managed, how competing pressures are resolved and how people behave when exercising professional judgement or responding to challenge.
The Audit Firm Governance Code: The Audit Firm Governance Code provides an overarching framework of good governance for the firms within its scope. It is intended to support firms in embedding the public interest in their purpose, governance, leadership and decision-making, including through appropriate independent challenge, accountability and reporting. We monitor how firms apply the Code and use the resulting evidence to inform our wider supervisory view.
We undertake a separate assessment of relevant firms’ compliance with the principles and objectives of operational separation. This considers whether the audit practice is governed and managed in a way that prioritises audit quality, protects auditors from influences from the rest of the firm that could divert that focus, and supports the resilience of the audit practice.
Our work includes the assessment of culture across firms on a proportionate basis, including whether incentives, performance management, speaking up and day-to-day behaviours support audit quality. We monitor relevant conduct matters, including non-financial misconduct, where these may provide evidence about leadership, culture or risks to audit quality.
This work is closely linked to the governance and leadership component of a firm’s SoQM, as well as its responses relating to ethical requirements and resources. The Code and ISQM (UK) 1 are complementary: the Code provides a wider governance framework, while the SoQM requires the firm to identify and respond to quality risks. Our work considers whether the firm’s governance and culture support the effective operation of its SoQM and whether relevant risks identified through this work are reflected in the SoQM.
Risk and Resilience
A resilient audit market depends both on the resilience of individual firms and on the market’s ability to continue providing high-quality audits if a firm experiences significant financial or operational stress. We assess aspects of firms’ enterprise risk management, crisis management and contingency planning, liquidity and access to credit, and professional indemnity insurance.
This work is a distinct part of our oversight of firms and the market, but it also informs our assessment of SoQMs. For example, weaknesses in workforce capacity, technology resilience, third-party arrangements or contingency planning may create or increase risks to audit quality. We consider whether firms have identified those risks and whether their responses are appropriately designed, implemented and monitored.
Firm Metrics
Audit Firm Metrics provide consistent and comparable information on key factors affecting performance of large audit firms[1] , facilitating meaningful discussions between Audit Committees, their Chairs, investors, and others. The 10 metrics cover areas such as people and culture survey results, training, workload, attrition, staff-to-partner ratios, and external inspection results.
Footnotes
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[1]
The twelve audit firms which are in scope of the Audit Firm Governance Code.