Regulator unveils major overhaul to its audit supervision
The Financial Reporting Council (FRC) is introducing a major overhaul of its audit supervisory model, aiming to replace the current system with one designed to enhance audit quality.
The accountancy watchdog is moving its primary focus to a system of quality management (SoQM), placing firm-wide quality controls at the heart of its new supervisory activity.
The new framework will scale supervision based on the firm’s and the audit’s specific risk levels, rather than applying a rigid, uniform standard.
Anthony Barret, executive director of supervision at FRC, said: “A system designed in a 2018 world is less relevant to a 2026 world.”
The FRC’s aims is to bridge the gap between audits for public interest entity (PIE) companies – firms which are larger or of significant public importance – and non-PIE audits, complementing existing initiatives to build capacity in smaller firms and in the small and medium-sized enterprise (SME) market.
The watchdog has been active ever since a host of high-profile corporate collapses, including Carillion, Patisserie Valerie and BHS, plunged the audit sector into scandal after scandal.
However, chief executive Richard Moriarty told Morning Wire recently that audit quality, particularly among the Big Four firms, has “tracked consistently upwards” since those “dark days”.
The regulator’s proposed plans suggest it feels audit quality has stabilised enough to move from a policing to a partnership model, focusing on SoQMs rather than just checking individual homework.
Moriarty said: “Over the past decade, our supervisory approach has helped drive sustained improvements in audit quality, and today we have a stronger, more diverse audit market as a result.”
“But we cannot stand still. This new approach represents the next evolution of our regulatory model — one that is more modern, proportionate and firmly grounded in risk.”
New approach comes after Bill disappointment
The ‘evolved approach’ follows the Audit Reform and Corporate Governance (ARCA) Bill, which Labour scrapped in January to “avoid significant new costs to firms”.
The primary goal was to replace the FRC with ARGA, a body with significantly enhanced statutory powers to oversee the audit profession and corporate reporting.
Moriarty told Morning Wire: “Although disappointed that we didn’t get the Bill, albeit not surprised, it will not deflect the contribution that the organisation’s got to make to supporting growth.
“The Bill was to improve audit quality after a very difficult time… but now audit quality has improved significantly in the last few years, but no one should be complacent.”