Governance, Leadership and Culture
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Governance and Leadership
Background
We promote good governance and leadership at the largest audit firms because well-governed and well-run audit firms are more likely to deliver consistently high-quality audits and to be operationally and financially resilient. The firms we regulate audit the UK’s largest companies and we want the public interest to be a key consideration in decision-making.
Audit Firm Governance Code
The Audit Firm Governance Code (AFGC) establishes a set of principles for good governance in large partnerships, supported by more detailed provisions which are followed on a comply or explain basis. The AFGC applies across the whole audit firm, not just the audit practice. Key elements of the AFGC include a requirement for audit firms to appoint independent non-executives (INEs) and to establish governance structures for holding the leadership to account and limiting individual power.
All firms that audit at least 20 public interest entities or at least one FTSE 350 company fall within the scope of the 2022 Audit Firm Governance Code.
We assess compliance with the AFGC and lead the FRC’s relationship with the INEs. Our assessments aim to raise governance standards within audit firms. The Governance and Leadership team supports the AMS Risk and Resilience team with monitoring compliance with the governance related elements of the Principles of Operational Separation.
We aim to identify good practice as well as gaps and weaknesses in firms’ governance and leadership arrangements. We provide feedback to the firms concerned and seek their commitment to addressing any issues we identify. We share good practice with other firms on an anonymous basis to encourage improvement in their own ways of working.
Pre-appointment meetings
We conduct pre-appointment meetings as standard with candidates for senior/managing partner roles across the twelve largest audit firms. We also hold pre-appointment meetings with INE candidates and with chairs of boards on a case by case basis. In all cases, we review candidate CVs and key documentation regarding the appointment process.
Once appointed, we hold regular engagement meetings with INEs in their firm groups. We also host roundtables which bring INEs from across the firms together and enable them to share good practice and experiences with fellow INEs.
Transparency Reports
We monitor whether the twelve largest firms are complying with their obligation to publish transparency reports. We review the content of firms’ transparency reports against legal requirements and the AFGC and provide feedback to the firms. We also assess whether transparency reports are fair, balanced and understandable overall.
Audit Committees
We review a sample of FTSE 350 companies’ audit committee reporting against the relevant part of the UK Corporate Governance Code and the Audit Committees and the External Audit: Minimum Standard. Our findings and observations are included within the Annual Review of Corporate Governance Reporting publication.
Culture and Conduct
Background
Audit firms need the right culture to drive behaviours which are necessary for the performance of high-quality audits. Root Cause Analysis undertaken as part of FRC enforcement activity and audit quality inspections has shown that behavioural and cultural factors are among the most common drivers of failure, particularly a lack of professional scepticism and effective challenge. Firm reporting of integrity and confidentiality breaches also point to culture being at the root of poor ethical conduct.
High-quality audit and ethical conduct
We undertake work to inspect and monitor the frameworks, processes and controls that the twelve largest audit firms have in place to promote and sustain cultures that support high-quality audit and ethical conduct. This includes reviewing how firms seek to influence behaviours associated with audit quality, such as professional scepticism and willingness to challenge. We also draw on insights from a biennial independent third-party culture survey conducted across the twelve largest audit firms to understand auditors’ perceptions of the environment in which they operate.
The largest twelve firms are required to notify us of instances of poor ethical conduct, including non-financial misconduct, and we expect them to foster an environment that supports high standards of integrity and professional behaviour.
Public interest and sustainability of the profession
We support the public interest through our contribution to safeguarding the reputation and resilience of the audit market, while also promoting the attractiveness and future of the profession. We do this by monitoring how firms leverage key drivers of behaviour to create cultures that promote high audit quality and ethical conduct.
International collaboration
We collaborate with audit regulators internationally to advance understanding of the role that culture, behaviour and mindset play in audit quality and ethical conduct. By sharing good practice, research and regulatory insights, we support the development of regulatory approaches that encourage firms to embed the cultural foundations necessary for high-quality audits and public confidence in the profession, globally.
Supporting audit market growth and resilience
We encourage growth in the audit market through supporting a competitive environment and creating a more level playing field for firms by sharing good practice, market insight, and perspectives on cultural and behavioural factors that underpin high standards of conduct and audit quality.