Rebecca McGregor  - Milly Murphy - Priya Kotecha Dispute Resolution

The FRC outlines its Approach to Audit Supervision

The Financial Reporting Council (“FRC”) has published a report on its ‘Approach to Audit Supervision’. The report, published on 31 March 2023, updates the previous version of this publication (first released by the FRC in March 2021) and develops on the FRC’s aim for greater transparency by outlining their current approach to audit supervision and the expectations placed on firms. The report also sets out the FRC’s future priorities, which include (among other things) a greater focus on assessing audit firms’ implementation of new auditing standards, as well as the FRC’s development of a new tool to aid the FRC in providing bespoke input to audit firms, outside of the formal supervision process.  

Purpose

The publication aims to serve three purposes:

  1. to aid accountability and transparency by outlining what the FRC intends to achieve with audit supervision, and how they achieve it;
  2. to communicate to the firms who perform statutory audits of Public Interest Entities (“PIE”) what the FRC expects of them in both requirements and practices, and what the firms can expect from the FRC in the course of supervision; and
  3. to identify examples and case studies which demonstrate the value of the FRC’s approach to audit supervision.

Approach and expectations of the FRC

As well as providing an overview of the structure and responsibilities of the FRC’s supervisory body, the publication sets out how the FRC currently supervises the UK firms that audit PIEs (“PIE audit firms”), and what the regulator expects of them. 

Tier 1 PIE audit firms, which includes the seven largest audit firms, can expect (among other things): (i) regular meetings with the FRC; (ii) annual audit inspections (with at least five audits inspected each year); (iii) reviews of the firm’s audit strategy and audit quality plans; and (iv) the production of an annual public report for each firm.

Tier 2 PIE audit firms, which includes firms conducting more than 10 PIE audits annually, can expect (among other things) regular meetings between the FRC and the firm’s senior partner/Head of Audit and independent non-executives; and a three-year cycle of audit inspections (with at least two to three audits inspected). A separate report is not produced for each Tier 2 firm; the reporting is instead consolidated into a public report on all Tier 2 firms.  

When dealing with any audit firm, the FRC expects that firms will (i) be open and honest in all their dealings with the regulator, (ii) take the initiative to raise issues of concern at an early stage and (iii) act in a cooperative and timely manner. 

FRC future priorities

The publication also outlines the FRC future priorities. These are as follows:

  • to deliver a full programme of audit quality review inspections and publish associated reporting;
  • the implementation of the Audit Firm Scalebox (the “Scalebox”) to provide bespoke input outside the FRC’s formal supervision processes, primarily to Tier 2 and Tier 3 firms. The Scalebox will aim to help audit firms understand and meet the standards of the FRC’s regulatory regime. The types of activities that the Scalebox will conduct with firms include inspection of individual non-PIE audits (not currently within the FRC’s scope) and reviewing and providing feedback on a firm’s system of quality management and governance arrangements;
  • the approval and registration of PIE audit firms;
  • the assessing of the effectiveness of firms’ implementation of new auditing and quality management standards and their culture;
  • the developing of the supervisory approach for audit committees;
  • the developing of the local audit system leader role and team in shadow form; and
  • the reporting on the implementation of operational separation, and developing the audit market monitoring function.

    The publication will be further updated when the FRC transitions to the Audit, Reporting and Governance Authority (“ARGA”) in order to set out ARGA’s new supervisory responsibilities and powers. The transition to ARGA is currently estimated to occur in 2024.