Risk and Resilience
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Improving and maintaining the resilience of the UK audit market is a key FRC objective. We assess and monitor various aspects of the larger firms’ operational and financial resilience. We focus our activities at an organisational level, because a firm level or non-audit service line failure (or significant incident) could affect the ability to find an auditor, audit quality, and market competitiveness. Our work is often in the form of private thematic reviews, which are designed to drive improvement through benchmarking. We also hold periodic risk management engagement meetings with the firms’ Chief Risk Officers (CROs).
Our work has a strong focus on the firms’ own risk management frameworks. We believe that good risk management increases the probability of organisational success and reduces both the probability of failure and the uncertainty of achieving the organisation’s overall objectives. We also review the firms’ internal audit arrangements, which are key for providing independent and objective risk-based assurance.
We focus on how firms manage particular risks, such as operational, regulatory, cyber-security and IT resilience, third parties, client and engagement acceptance, and network risks that could have consequential impacts. This complements the quality framework assessments undertaken by the Systems of Quality Management team by focusing on how firms manage particular risks at a whole-firm level. We also assess the firms’ business continuity management, crisis management and recovery and resolution planning frameworks.
| Name | Recovery and Resolution Planning - Guidance and Benchmarking for Audit Firms |
|---|---|
| Publication date | 29 April 2024 |
| Type | Guidance |
| Format | PDF, 141.5 KB. View HTML version |
In addition, we focus on financial resilience risks. This includes risks related to firms’ financial performance, liquidity and access to credit, and assessing the adequacy of their professional indemnity insurance arrangements.
We assess and monitor the four largest firms’ application of the Operational Separation principles, in conjunction with the Governance, Leadership pillar. The objectives of the principles are to improve audit quality by ensuring people in the audit practice are focused above all on delivery of high-quality audits in the public interest, and to improve audit market resilience by ensuring no material, structural, cross-subsidy persists between the audit practice and the rest of the firm.
We also annually collect and publish Audit Firm Metrics (AFMs) which form part of the FRC’s Market Health Indicators. These are measures which we encourage firms, audit committee chairs, and other stakeholders to use in their engagement and dialogue on quality. The 10 metrics cover areas such as people and culture survey results, training, workload, attrition, staff-to-partner ratios, and external inspection results.
We conduct pre-appointment meetings on a risk-assessed basis with candidates for the role of CRO within firms.
The objective of the above activities is to proactively enhance the resilience of audit firms and the audit market. Audits underpin trust and transparency in financial reporting, enabling companies to access capital and maintain the UK's position as a leading global business environment. Firms delivering high-quality audits support investor confidence and long-term economic growth.