A consultation on the Future of Audit Supervision
Published: 13 August 2025
11 minute read
Join Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs and Sarah Rapson, Executive Director of Supervision, as they discuss the FRC's latest phase of engagement on the Future of Audit Supervision Strategy (FASS). This episode explores how the FRC may evolve its supervisory approach to centre on firms' systems of quality management, moving towards a more proportionate and qualitative framework that supports audit quality across the entire market. Sarah shares insights from extensive stakeholder engagement and outlines key proposals including changes to inspection approaches and reporting methods. The consultation, running until 30 September, seeks views from all stakeholders with an interest in creating a supervisory environment that promotes a resilient audit market whilst reducing regulatory burden and supporting trust and confidence in UK businesses.
Transcript
00:39:01
Hello there and welcome to another FRC ‘In Conversation’. My name is Kate O'Neill, I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC and today the topic is the next phase of our Future of Audit Supervision Strategy. So it's right that I'm joined by our executive Director of Supervision, Sarah Rapson. Welcome, Sarah. I guess, Sarah, I mean, we've talked about this in previous podcasts and a lot of hard work going on since the last time I spoke about it.
01:06
But what are we launching today? Because I guess might be a good place to start to remind our listeners why we're undertaking the future of audit supervision strategy. The Future of Audit Supervision Strategy, or FASS, as we call it, Kate, you always like an acronym is a comprehensive review on our delivery approach, we think it's really important that we should always evolve our regulatory approach to make sure that is it is fit for the future.
01:34
You know, that it continues to support an environment that promotes a resilient audit market and enables firms of all sizes to deliver high quality audit while driving accountability and improvement. And we would all agree that a robust and proportionate of course supervisory approach is essential to ensure a well-functioning audit market and the profession itself. So, and that all is really fundamental to maintaining the UK's status as a leading global destination to build and scale a business.
01:34
This is a really important project for the FRC. We mentioned it in the three year strategy, which we published at the back end of last year. So really pleased to be able to talk about this again with you, Kate, in today's podcast. I think it's an important point to make Sarah about helping UK status as a leading global destination to build and scale a business, because yeah, a lot of people may not realise how important high quality audit is to helping businesses not just present their accounts in a clear and transparent way.
02:04
That gives stakeholders confidence that the way in which the company is talking about its ongoing business, its prospects, its future, really needs that high quality audit to assure stakeholders that the information they're receiving is correct. That's why the work that we do is so important, you know, if investors can be confident in the disclosures made by companies assured by the auditors, that's good for the UK corporate landscape.
02:31
I'm sorry, Sarah, we're not starting our engagement today. We've been engaging in a number of different ways since we last spoke. So how much has this engagement really underpinned and helped develop the proposals that we are talking to all of our stakeholders about through this consultation? I've been delighted Kate with the engagement, the open dialog, the willingness stakeholders have shown to engage with us to support this review of our supervisory activities.
03:02
Everybody agrees on the shared objective to have a supervisory environment that promotes the resilient audit market and audit quality, as you just described for firms of all sizes, by the way. So really pleased with the engagement so far. The themes that we have engaged stakeholders on have been threefold, so around proportionality of our approach, the model itself and also how we report and our initial conclusions across those themes based on the engagement today are
03:30
firstly, the shift towards an audit supervisory approach that centered on firms, the systems of quality management so ISQM is important. You like an acronym, Kate? So but I, you know, really grounding the supervisory approach on firms ISQMs - systems of quality management is universally supported. And then agreement that of course in moving to that change it does need to be proportionate and it does need to wear appropriate to reduce regulatory burden for us also to consider the right balance of accountability between the firm itself and theory that are recognised individual.
04:08
Another theme that came out was a real desire for us to limit the difference in our regulatory approach between the FRC and the RSPs, the recognised supervisory bodies. People talk about a perceived cliff edge in regulation between us and the bodies. So what can we do with our approach to reduce the disparity in cost and complexity between the various, regimes?
04:33
And I think the final theme that comes through is that while everybody wants we, we also want the regulator to continue to be transparent. How can we make sure that our public reporting appropriately represents performance, particularly for smaller firms? There's a lot of different views on how we report and really interested to continue to hear from stakeholders how best we do that.
04:53
On the understanding that we must continue to be transparent as a regulator. Absolutely. I guess through all of that engage, you've kind of coalesced around these themes, which people are supporting and telling us are the right things to concentrate on. So what's the aim of launching this further engagement today? Do you want it to be a bit more formal?
05:17
If you want to kind of really see some details from stakeholders that may inform the next phase of this project. We've spent quite a lot of time talking to stakeholders on a one-to-one basis and in roundtables gathering views. We've now been able to sharpen up some proposals, and I think this next phase, Kate is an opportunity for people to more formally give us their feedback on what we've shaped against each of these different areas.
05:47
So it is a slight shift in the project if you like. And why is aligning our future supervisory approach to ISQM so important? Is this a big step change or is it an evolving some experience we've had in this area already? First thing to say and possibly should have said upfront, Kate, is that we are evolving our.
06:09
supervisory model here. There's a lot about it that does work really well. And we've had some success in improving audio quality, particularly at the larger end of the audit market, but we, you know, must continue to evolve. So this is an evolution of our supervisory approach. We do think that the balancing of our supervisory approach to bring in our assurance of systems of quality management is important.
06:31
We think that gives us the best way to embed continuous learning and to create more of a sort of learning environment and system accountability with a focus on behaviors. We all agree that improvement in order quality is right important for all stakeholders. So sorry for what you're saying, this is going to be much more of a mixed approach with some qualitative factors in there.
06:52
Rather than perhaps the perception some people have had saying it's right or it's wrong. It gives us a much more qualitative view of where audit quality is in individual firms and across the market, so that we're not over index Kate on the inspection scores, which is also a theme that's come up in the engagement. It's a much broader view of it.
07:13
I mean, there's always a place for the work that we do around for inspections, and that actually supports what we might think of as the efficacy of firm systems of quality management. But it's a much broader view. And I think our view is, and certainly stakeholders in the engagement so far have backed this up, that this will give us all a richer view and will create an environment for learning and for the right conversations.
07:38
So would you say then these systems of quality management will reflect the particularities of the firm, whether it's size, whether it's complexity, the type of work it does? And do you think that's another example of making sure and evolving the supervisory approach that it's based on proportionality? Our proposals for our supervisory approach assume that systems of quality management should be tailored to individual firms, and we want our supervision of that to be proportionate.
08:08
And what that means is doing the right work to respond to the risks arising from a particular firm's impact on the market, the specifics of its portfolio and our assessment of its risk to that. We would augment it with our view of the firm's own audit business risk and also its operational and financial resilience. And that's really important because the portfolio of entities that a firm will audit affects the approach that the firm takes to its work and the weaknesses, for example, in the operational and financial resilience of a firm as a whole might also negatively affect the audit practice.
08:42
So a framework that has ISQM 1 in balance with also questions around business risk and the resilience of the firm is what we think our future supervision approach could look like. And in the consultation we're asking for views on graded file inspections. Can we update or maybe even educate our listeners as to what does that mean? Graded Final Inspection is sometimes described as an AQR inspection because that's the name of the team or the quality review that actually does them.
09:13
They are a deep dive into a particular audit file of a particular audit firm of a particular entity, and we will assess whether the file gives sufficient evidence that the audit has been done in the right way. And then we will first go and people will know that score is then aggregated and then is the current indicator of audit quality.
09:34
Now look they are really important part of the toolkit. Interestingly, in our engagement so far, people's comment on the graded final inspections typically is on how we report on them. And the vast majority of stakeholders so far that we've spoken to do continue to want them to be part of the supervisory toolkit. Our proposals are that we continue to do graded final inspections in the way I've just described, augmented by a number of different kinds of inspections as well.
10:05
Another proposal to broaden out how we do our supervision to get a widest possible view of audit quality. So in three different ways - one is what we're calling corroborate file inspections. So this is testing whether the firms the audit firms own internal monitoring inspections are doing the right job. So this will help us understand how the systems of quality management are operating follow up inspections.
10:31
So where we have spotted an issue in a previous annual cycle, previous inspection, we go back and check, you know, has an improvement been made. And we don't do that at the moment systematically. And then also thematic file inspection. So where for example we might have identified a risk in a particular audit area, we would do a focused firm review.
10:49
And it could be at a specific firm or a range of firms. So I think a much more sophisticated menu of different types of inspections. So that will give us more tools in the supervisory toolkit. But I think a greater opportunity for us all to do system learning. So from what you're saying, it reflects that the audit market has changed a lot in the last five or so years, as has the corporate world.
11:13
And so it's more qualitative mixed with, as you say, but necessary quantitative baseline will reflect that change in the market. So the transition year will be important. How will that impact the supervision of audit firms? I mean as you say there's no cliff edge. But how should people be thinking about that? Another one of our proposals Kate, which we're interested in people's views on is a transition year.
11:38
Transition year will reduce the number of specific inspection work that we perform on firms systems of quality management through the ISQM 1 standard, versus what we might do in the future. I mean, it won't stop us from engaging with firms during that period, of course, but we want to take the time with firms to discuss and understand their approaches to ISQM 1 and the impact of our future supervisory approach with the firms to make sure everybody's ready.
12:02
I say everybody's ready. We want the firms to be ready and operating well. We also want to make to take the time to make sure that our supervisory framework that assesses how firms are doing is efficient, effective and also proportionate. So is there anything, Sarah, that you've heard, because you've been pretty much crystal at every roundtable, in every conversation today?
12:23
What stayed with you or changed how you were initially thinking about this and our approach to supervision? I have done quite a lot of listening. Personally, I think a few things. One is just is just how important it is to engage widely with all stakeholders, but not just with the audit firms themselves and the professional bodies, but also the audit committee chairs and the investors and the lenders, and they are harder to reach.
12:48
And the second thing, I think there's an agreement that we should move away from over indexation on file inspection scores, so AQR scores. But firms are keen to retain the inspections themselves because they do see them as driving audit quality. So that was quite interesting to hear. And I think a real desire for more real time learning from us.
13:10
So more thematics, more roundtables so that we share really quickly what we find and what we see. How does the new model impact the work the professional bodies? I mean, as you've said earlier, this is about the whole of the market, not just the firms that the FRC directly supervises, but through our work with the supervision of the professional bodies
13:31
who perhaps you could call it the smaller end of the market. The really important point, you know, the FRC is responsible for the whole audit market, not just PIES, as you've just said. Kate, obviously we delegate the responsibilities for the regulation of non PIEs to the RSPs, the recognised supervisory bodies. But as all PIE auditors also audit on PIEs.
13:53
And we want to enable non PIEs auditors to enter the PIE market within our proposals. We intend to work really closely with the RSPs so that the supervisory model, the supervisory approach that we that we put in place can and will be applied proportionately across the whole market for both the FRC and the RSPs. Now, you mentioned reporting, I think you right, reporting is a hugely important part of being seen as a transparent regulator, so reporting can be seen as a blunt instrument.
14:21
You know, you're either good or your bad is successful or not. So what have you heard about reporting in the engagement today? In our consultation, you'll see that we are posing some questions on reporting. It's fair to say that the proposals in this area are less well developed than in some of the other areas, because there are a lot of things to consider here.
14:42
One of the areas that there is consensus over is the unintended consequences of how we currently segment the market, Kate. So we group firms in tier, so we'll have tier one, tier two, tier three, and every so often we might talk about tier four, which is a proxy for firms that could come into the PIE market but haven't quite yet chosen to do so.
15:02
And this has become a bit of a league table externally. Some firms have told us this actually has impacted their ability to compete, and that was never our intention. And I think it is important that, you know, the FRC isn't in the way of a competitive market. So we are proposing, and I'm expecting this one to be universally supported, to stop using the tiering language and to stop bucketing firms in an artificial way externally.
15:31
And I think, as we've said in the engagement stage, there's been a lot of appetite for that. So with this consultation, Sarah, who are we looking to hear from and how can they get involved? All stakeholders: audit firms, audit committee chairs, investors, lenders, professional bodies so really keen to keep the dialog going, but also to hear from interested stakeholders formally in this phase.
15:59
Today we're launching our consultation document. It will be open until the 30th of September. And from now until the closure of the consultation, we will be engaging further with all stakeholders, in the UK audit market over the next month or so. I guess it's important stakeholders know that they can reply formally, and there's details on the FRC’s website on how to do that, but there will be some targeted roundtables
16:26
Sarah, where should people want to contribute? Voices around the table. That is another avenue. But if you want to be heard, you have to engage, right? Exactly. So we had some really great roundtables in the first phase of consultation. It'd be great for people to come along and give us more feedback on the proposals, because we've actually got something for people to respond to, but also very much welcoming any written feedback that stakeholders want to give us, because we are really keen to hear from all stakeholders so that we make the most of this really great opportunity to make sure our supervisory approach is fit for the future.
17:01
Thank you, Sarah, and to all our listeners out there. This is an important consultation for the FRC for lots of different reasons and the important issues that Sarah raised, so please get involved. The consultation is on our website and lots of information about how to either formally respond or get involved during this consultation. Thank you Sarah Rapson, Executive Director of Supervision.
17:26
And please, as I say, go to the website for all the information and tools on how to get involved. Thanks very much, Kate.