Confidence grows in audit, but more needs to be done says FRC report
14 July 2016
Confidence in audit has grown, but more needs to be done in terms of market competition and improving good practice in the profession according to a report issued today by the Financial Reporting Council (FRC).
Developments in Audit: An Overview 2015/16
(PDF) is the first report of its kind for the FRC as the UK’s Competent Authority for audit. The report focuses on assessing justifiable confidence in UK audit and also summarises the current ‘state of play’ as seen by the FRC and its stakeholders. It is supplemented by a more detailed report of the FRC’s audit related activities and evidence gathering.
The FRC believes there is a justifiably higher level of confidence in audit as a result of changes to independence requirements and the promotion of quality as a driver for competition in the audit market. However, it also notes some remaining concerns around confidence.
Melanie McLaren, FRC’s Executive Director for Audit, said:
“Our vision for audit is that it is trusted to provide reliable assurance on the publicreporting of financial information, and in doing so, promotes good governance and facilitates the effective allocation of capital.
“The FRC's strategy is to promote continuous improvement in audit quality. One of the key factors in achieving this is to engage with other regulatory professional bodies, auditors, audit committees and investors to communicate good practice.”
Two years ago, the FRC commissioned YouGov to benchmark confidence in audit in the UK. That survey showed while those close to audit expressed confidence in the process, those more removed, including some investors, did not share the same level of confidence. Fast forward to 2016 and the follow up survey indicates stakeholders have a clearer understanding of what audit is and a higher level of confidence in it. But recent corporate failures and the resulting increased public scrutiny of auditors, have undermined some of this progress.
The FRC’s report on the current state of audit identified these key influences on confidence:
- Audit firms are seen as more independent and competing for audit engagements on quality grounds, but concern remains that the FTSE 350 audit market is concentrated across the Big Four firms, as the smaller firms are thought to struggle to match on skill level, resource and ability to bear the cost of tendering processes.
Developments in Audit 2015/16 - Overview
- EU regulatory changes have also bolstered confidence, with the introduction of mandatory rotation and the tightening of rules around non-audit service provision. However, some fear the increased public and regulatory scrutiny could deter future talent from joining the profession, thus impacting long-term quality.
- The FRC’s audit monitoring results and those of the professional bodies show audit quality in the UK is improving. In 2015/16 the FRC assessed 77% of FTSE 350 audits it reviewed as requiring no more than limited improvements. The FRC considers that at least 90% of FTSE 350 audits should fall into that category by the end of its 2016/19 strategy.
- The large firms are beginning to improve the effectiveness and efficiency of audit through the transformative use of technology, which should prompt further competition on quality. This raises further concerns about smaller firms’ ability to compete, what the role is for the auditor and how regulators and standard setters will be able to keep up.
YouGov survey - Confidence in the Value of Audit
Notes to editors:
- The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We are the UK competent authority for audit and set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent enforcement arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.