In Conversation: Annual audit firm inspection results 2025
Published: 15 July 2025
14 minute read
In this podcast episode, Kate O'Neill, Director of Stakeholder Engagement and Sarah Rapson, Executive Director of Supervision discuss the 2025 Annual Review of Audit Quality. The report explores the inspection and supervision results of audit firms across the UK Public Interest Entity (PIE) market while also highlighting the introduction of the audit firm metrics.
Transcript
0:12
Hello and welcome to another FRC in Conversation.
0:16
My name is Kate O'Neill.
0:17
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.
0:21
And today I'm joined by Sarah Rapson, our Executive Director of Supervision.
0:26
Welcome, Sarah.
0:28
Thanks, Kate.
0:28
Really good to be here.
0:29
Sarah.
0:30
We're here for an important annual event for the FRC where the Supervision division leads on much anticipated and very well received annual report on audit quality, which looks at the larger audit firms in the market.
0:47
So it's an important piece and as I say, much I anticipated and very well received annually.
0:54
But Sarah, I'd like to kind of take a step back because in some of our other in conversations published this year, we've really explored not only what is an audit, but why is audit important and what part does supervision and its regulatory function play in this important role of audit.
1:12
It's a really important publication Kate and looking forward to talking about it.
1:17
We're just backing up a minute.
1:18
Audits are vital to the UK economy.
1:20
We talk about that quite a lot, don't we?
1:22
They bring transparency and trust into financial statements, which is essential for keeping capital flowing and maintaining the UK status as a leading global destination to build and scale a business.
1:34
And we talk a lot about well run companies with accounts that are signed off by directors and assured that the quality audit gives investors and the public confidence in companies that enables them to access capital and support the economy and OSC provision.
1:47
Our regulation actually is intended to support that.
1:49
We have shared objectives with the industry to make sure that quality audit prevails.
1:55
I think also, Sarah, before we move on to the report, it does give investors in the public confidence, but also stakeholders in well run successful companies, employees, supply chains, which are all part of the fabric of a successful UK economy, right?
2:11
It's much wider than just the investors.
2:13
You're absolutely right.
2:14
All to the annual report, all in the UK has improved since 2018.
2:19
What key initiatives or changes do you think have driven this progress?
2:23
And I know that you've and I have done a podcast about the project that the FRC announced earlier this year, the Future of Audit Supervision Strategy.
2:35
It'll be great to hear how that's going to build on this improvement as well.
2:39
They're really pleased with the improvements in audit quality over the last three, five years and also that audit quality in the UK compares really well internationally.
2:49
We look at some of our peer regulators and how they describe and how they calculate and measure audit quality and actually the UK fares really well.
2:56
I think that's really important again for the confidence that investors and others can have in this disclosures by companies etcetera, as we were talking about a few minutes ago.
3:04
So it's a really good story and actually I pay tribute to audit firms, all of them and particularly the larger firms have invested considerably in audit quality over the last three, six years or so.
3:16
And you know we should pay tribute to them for that.
3:19
I would also say that our own forward-looking supervision approach, the fact that we've got dedicated supervisors for the larger firms, the work we do with them on governance and culture and also holding them into account through our inspections etcetera has a part to play in making sure that audit quality stays front of mind for everybody.
3:36
So real joint effort really between the sector themselves and also we like to think us as the regulator.
3:42
You asked me about our FASS programme.
3:44
We have our future of audit supervision programme of work well underway now.
3:48
We talked about it in the three-year strategy that we published at the back end of last year.
3:52
So one of our major initiatives and in a way, if we as the regulator hold the mirror up to the performance of the regulated community, whether that's audit firms or the professional bodies who we also regulate, it's very important we also turn the mirror up to ourselves and make sure that we are fit for the future.
4:09
So this initiative is to have a look at our supervision model, the impact of our regulation, the sector, how we report, etc.
4:15
And we've been doing a substantial amount of engagement, Kate, haven't we, with the supervision team and yours to make sure that we hear from not only the firms themselves, but also others, audit committee chairs, for example, to hear what they have to say about those important points of how can we make sure that we're proportionate?
4:30
How can we make sure we've got the most effective supervision model yet?
4:32
How can we make sure that the accountability is in the right place?
4:35
And one of the other important questions was going forward, how are we going to report.
4:39
So today's report that we'll talk about in a minute is of a particular format.
4:43
But going forward, how can we seek to continue to improve and modernise our own reporting so that the market hears what it needs to hear about, what we think about audit quality in the right way.
4:52
Picking up on your comment on governance, culture, etcetera, we've also coming up operational separation, three year marker.
5:00
How much is that do you think contributed to, as you said, what's been a system wide change at firm level to the way in which they are looking at audit quality in their own systems?
5:11
Operational separation or upset as we call it?
5:14
For sure, it applies to the largest four firms and we pay tribute to them for the positive, energetic way that they've brought that to life in their organisation.
5:24
It is of course a voluntary regime, but they have embraced it.
5:27
And actually when you talk to people who are involved in the governance of those firms, they are very positive, particularly around the introduction of separate audit oversight boards, because it gives the focus on audit quality in a way that perhaps it wasn't there before.
5:39
So it is inevitable that the improvements and strengthening of governance in the larger firms has had an impact on audit quality.
5:46
And also some of the smaller firms to whom Upset does not apply have seen what's going on well and has decided to bring some of those arrangements, their own firms with positive effect as well.
5:56
That's on a voluntary basis, which has to say something about, as you say, the positive impact of some of these measures flowing through firms and people adopting them voluntarily.
6:06
Exactly.
6:07
Turning to the report, it shows over 80% of Tier 1 audits had positive outcomes in the delivery of audit quality.
6:14
What's driving this improvement and how sustainable is it across the wider public interest entity market?
6:21
We're pleased with that result, Kate, and the firms have built on recent progress and the investment I've already talked about on the part of the firms has been significant.
6:29
I think the other thing we would say is that it's really important that firms that do well are also not complacent.
6:34
This is the message that we would give to firms in all of our supervision conversations with them that the improvements in quality are hard won and they must be maintained.
6:41
So we're very interested in consistency and making sure that it continues to be front of mind for them.
6:47
That's a great reminder.
6:49
Complacency is sometimes the worst enemy of success, isn't it?
6:52
But also as we looked to improve our approach to support the audit market, you don't want to see anything being static.
6:59
You're absolutely right.
7:00
And our regulatory response has got to keep evolving to keep up with changes in the market.
7:04
You know, we can't be complacent either.
7:06
However, that's about tier one.
7:08
Are we concerned about the growing gap between Tier 1 and non-Tier 1 firms?
7:13
People may say well it's easy for those guys to be improving better etcetera because they're well resourced, they have the funding to do so.
7:21
What can be done to support smaller firms in meeting audit standards without creating disproportionate regulatory burdens?
7:28
So you're right, whilst we've seen significant improvement in overall quality of the audits delivered by Tier 1 firms this year, just as a reminder, in Tier one, there are the larger 4 firms, so Deloitte, EYKPMG and PwC.
7:42
And also for these results and BDO, Deloitte, EY, KPMG and PwC have continued to build on the substantial progress they've made in audit quality over the recent years.
7:52
We're particularly pleased to see an improvement in the audit quality inspection results for Forvis Mazars this year.
7:57
Of course, it's too soon to identify this improvement as a trend.
8:00
It is an encouraging indication that the action has been taken by the firm are having an impact.
8:04
Of course, the firm needs to continue their effort to make sure that there is lasting improvement.
8:09
However, they do continue to be recurring audit quality findings at BDO.
8:12
I mean, there have been an improvement in the percentage of audits that we did assess, but the results are overall short of our expectations.
8:19
So we will continue to work with the new leadership at BDO and keep them under close supervision.
8:24
And with all the firms, we expect them not to be complacent, and we want BDO to make sure that change happens at pace.
8:30
But you also asked about the rest of the market and it's really important we take a stand back and look at the market as a whole.
8:35
And in our report, we also talk about the overall inspection results for Tier 2 and Tier 3, which we didn't do last year because we want to help give a sense of what's happening across the whole market.
8:44
And yes, we are worried about the gap in quality between the larger firms and the smaller firms in the non-PIE sector.
8:51
That's a really important point, isn't it, Sarah, because some listeners may assume that we're already looking at large firms.
8:58
And you've made the point, and I think it's one that we should emphasise.
9:01
The FRC is responsible for the whole market.
9:04
And this work on the Tier 2 and Tier 3, which I know you're about to talk on, is important for our listeners to really understand.
9:12
But also there are parts of the Tier 2 and Tier 3 market who do not undertake public interest entity orders.
9:20
Exactly right.
9:21
And I think that's really important for listeners to understand when we talk about an overall quality gap, we're talking about the pie world because that's the bit that we explicitly regulate.
9:30
However, we also are responsible for the whole market, including the non pie sector through the professional body.
9:35
So it's a more complex picture than perhaps if you just take, you know, our inspection scores results without understanding the full context and the full business that the smaller firms are responsible for.
9:45
That's a very limited view of audit quality.
9:48
That's really important.
9:49
It's also really important to say that for some of the Tier 2 firms, you know, 100% of their audits have been categorised as good or limited improvements over the last three years, where some have had no audits in that category.
10:01
So there's quite a difference even in the tiers, and I think that's really important for listeners to understand as well.
10:07
Also, we've included in our report the inspections of the Tier 2 and Tier 3 non-PIE audits by the RSBS.
10:13
And of course, there's a higher trend in audit quality with 81% of the audits inspected in 2024 being assessed as good or generally acceptable.
10:21
And that of course, does reflect the lower complexity some of the firm's portfolio and some of the non π audits that they have and also differences in the scope of our inspections.
10:30
So it is a proportionate response.
10:32
I think, Sarah, to remind our listeners, RSB’s are the recognised supervisory bodies, for example, the ICAW.
10:38
And also, Sarah, some of those inspections would, as you say, be proportionate because they'd reflect that some of these audits would be of not very complex entities or simple business models.
10:50
That's right.
10:51
You can't compare that.
10:52
Pies themselves can be quite different.
10:54
You can have a complex π and a not very complex PIE Similarly, you can have a complex non-PIE and a non-complex non PIE.
11:01
There's too many negatives in that in there, Kate, but you get the point.
11:03
You think, you know, you do have to dig underneath the results to understand the portfolio and the competence of each of the individual firms.
11:09
And Sarah, this report covers the introduction of audit firm metrics and case studies.
11:15
What are they contributing to audit quality and why are we introducing those metrics?
11:20
There's more measures in the public domain than just the audit inspection scores and the results of the system of quality management inspection findings which are in the report, because there's a lot more going on to create a good audit than simply how we might measure those two aspects.
11:37
So it was very keen for us and we worked really closely with the firms to pull out some other data points that can inform conversations between the audit firms and those interested, perhaps audit committee chairs, for example.
11:48
So for the very first time we are publishing some data which we're calling Audit firm metrics.
11:54
This is a voluntary initiative that we've worked closely with the firms on.
11:58
And however things like the number of hours our eyes have spent on an audit, average hours worked by staff on audits both in and outside of busy periods, how much training has gone on in the teams, etcetera.
12:10
So some hopefully useful data for good conversations to take place as audit committee chairs are dealing with their auditors or choosing audit firms to pick intenders etcetera.
12:22
So that's to your earlier point Sarah.
12:24
The just looking at the cold hard statistics is not giving the real picture to the clients of audit firms, audit committee chairs.
12:33
These metrics complete the picture.
12:36
Appreciate that there are some nuances or qualitative factors.
12:40
The bottom line here, we're both saying this Kate is that you've got to look at the context in which audit quality is delivered.
12:46
And hopefully this data can help paint some of that context for the right sorts of conversations beyond simply the inspection scores, which are a bond instrument on their own indeed.
12:55
So Sarah, it also the first year that we've looked at the full inspection cycle under ISQM 1.
13:03
And I will leave it to you to tell our listeners what that acronym means.
13:08
What have been the most notable findings from this implementation and how firms adapting to the new quality management standard?
13:16
I think the ISQM 1 acronym stands for the International Standard of Quality Management.
13:21
This is the new standard or newish standard following the ISQC standard that predates it, which was much more about controls.
13:28
This is a much more broad system wide standard which ought to give us a broader sense of audit quality.
13:34
And as you say, yeah, this is the first full year where the firms have been using it and we've got some findings.
13:40
I think overall it's a good story for a new standard.
13:43
You wouldn't expect everything to be perfect in the first year and actually firms are at different levels of maturity again and I think that is to be expected given where we are in the cycle.
13:52
I'll leave it to listeners to read the report to get into the the detail, but some of the key areas covers are how firms go about acceptance and continuance, their engagement performance, their governance, how they communicate, how they deal with their capabilities, their IT, their human resources, etcetera.
14:10
And how they assure themselves that all of those things are working well and in concert with each other to build a whole system.
14:16
It's important, I think, to note that the standard itself is intended to be proportionate, Kate.
14:20
So this idea perhaps that, you know, a large firm's system quality management needs to be copied and inserted into a small firm is, is for the birds.
14:30
It is a standard that is entirely able to be applied to a smaller firm.
14:35
And we work really closely with smaller firms to help them come up with a proportionate response to setting up what is actually a really important new standard.
14:42
And actually back to the change programme, we talked about before around this, the future supervision model, there is emerging consensus that shaping our future supervision model around the systems of quality management using this standard is the right way to go.
14:56
It's really important that we work with all firms of whatever size they are to make sure they have an appropriate system of quality management, helping them drive good order quality.
15:04
And Sarah, what you've just said shines so much with podcasts we've done to date this year on the whole thing about proportionality, you know, taking a standard and applying it blindly, whether it's across the firms, whether across companies is just not the way that the FRC looks at it.
15:20
And I think we need to keep doing some myth busting on that, don't we, Kate?
15:23
Because that's when people draw the wrong conclusions.
15:25
And we're not comparing apples with apples.
15:27
Now to the inspections themselves, Sarah.
15:29
And you know, we know that people have lots of different opinions on audit inspections, but we take that risk-based approach and the limitations of the sample sizes, which are natural.
15:40
We can't go and inspect every audit across the whole of the market.
15:44
How should stakeholders who do this report, as you say, get a sense of how not just the mark doing, but perhaps particular firms they engage with, how should they interpret audit quality findings without drawing misleading conclusions?
15:58
Building on your point that you've just made, the really important point, Kate, isn't it?
16:02
This is a risk based sample with some random sampling in, but it is not a statistical sample of audit quality across the market and it was never intended to be.
16:10
So, you know, it is important that those stakeholders who do read and use our report and our findings do think about the whole context as we've been talking about in this podcast.
16:22
I think for audit firms, I mean there will be supplemented to the overall report is an individual public report on each firm.
16:28
There's a lot in there which talks about what firms do well, but also other areas where we think they've got to continue to improve.
16:34
And I think audit firms themselves working with us to make sure that they are focused on the areas that we call out audit committees as they assess the quality of the audit that they're getting from the current audit firm.
16:44
And also in there, if they're running a tandem process in the near future.
16:47
Have a read of our report and the individual reports as they think about which firms to invite to, to tender and for investors and users of financial reports to make assessments about the quality of audit transparency and accountability in the relevant markets across both π and non π.
17:01
So looking ahead, what are the biggest challenges and opportunities facing the UK audit market and profession?
17:07
And how can all players in the system contribute to a more resilient and, you know, more trusted audit ecosystem?
17:15
I mean the FRC, there's only one part of that system and nothing standing still, is it Kate?
17:20
I mean the developments in developments in technology, ownership structures, the business environment, you know, they present both opportunities and challenge for the future of the UK audit landscape.
17:31
Obviously we've been very keen to understand what's happening with ownership structures and you know, been some examples of changes in capital restructuring and alternative ownership structures in some firms in the UK audit market.
17:44
You know, and actually you can see positives, right?
17:45
There's additional investment available for things like technology or developing the firm themselves, which is a good thing.
17:52
We're interested in making sure that the audit firms stay independent, that public interest is preserved and that those firms continue to comply with the regulation.
18:00
But this is all possible to be done.
18:03
I think our key message on that one, Kate, is always come and talk to us early.
18:06
We've been pleased to see the examples of where people have done that.
18:09
Exactly where it's gone well has been when firms have talked to us early and we've actually worked with them to help shape the arrangement such that they can comply.
18:18
And I think that has been really received positively by those firms that have talked to us nice and early.
18:22
The sustainability assurance market is underdeveloped.
18:25
You know, we know that there's inconsistent quality and limited provider diversity.
18:29
So we would agree that we would need a clear regulatory framework and improve transparency to as that matures on AI and automated tools.
18:37
I mean, everybody's talking about them now, aren't they?
18:39
There's no one, there's no one not talking about that.
18:42
And it's not just the professional services industry.
18:45
Well, exactly.
18:45
It's not just audit either, is it?
18:47
I mean, it's everywhere.
18:48
But I think in audit, the audit firms are using this sort of technology, but not for the audit opinion itself, but for helping the audit teams become more productive.
18:56
But that's bound to continue to evolve, isn't it?
18:58
So we're really keen to keep up to date with developments there.
19:02
And because all of this is changing back to the fact that while our own regulatory approach must continue to evolve and make sure that we don't get in the way of innovation and make sure that the objectives that we have around audit quality are preserved.
19:15
But you're absolutely right, it's not just US caters it, I mean good audit quality.
19:19
We have a role to play from the part of the regulator.
19:21
But I think we would all agree what's really important in audit is public confident, high quality, supporting growth and positioning the audit sector for future success.
19:29
And that's not just us, that's the firms themselves, that's company directors, the professional bodies, investors, educators.
19:36
We've all got a role to play in making sure that the audit market continues to be resilient, deliver the right outcomes for the public interest.
19:44
Sarah, thank you for that.
19:45
As ever, this annual report is important, as I said before, very well received, but I think it's a richer report this year given those new additional the metrics talking about one year on for the ISQM 1 reporting.
19:59
So readers will find more information.
20:02
I think you'd agree Sarah in this to help them be more informed, but also see the whole picture of the audit firms.
20:10
That's right, Kate, and that's why this report does evolve every year because the market changes every year.
20:15
We're really keen that the reports that we put into the public domain are useful for the various stakeholders for whom it's targeted at.
20:23
Well, Sarah enjoyed our annual discussion on this and encourage listeners to access the report on our website.
20:30
And also, as ever, always very interested in feedback, Sarah.
20:34
So I imagine that will come through a variety of ways either through the professional bodies, through supervisory relationship and our in stakeholder engagement programme.
20:44
Thanks again, Sarah.
20:45
Thanks very much, Kate.