A closer look at the FRC’s review of listed company accounts and audit regulation

With Richard Moriarty at the helm, the Financial Reporting Council (FRC) is on a mission to revolutionise regulatory practices. Drawing on his extensive 20-year career in regulatory institutions, including a stint as CEO of the Civil Aviation Authority, Moriarty brings a wealth of experience in economic regulation, competition and diverse regulated sectors to his role.

The FRC’s five strategic objectives remain unchanged for 2024/25:

1. Set high standards in corporate governance and stewardship, corporate reporting, auditing, and
   actuarial work
2. Promote improvements and innovation in areas for which the FRC are responsible, exploring good
   practice
3. Influence international standards and share best practice through membership of a range of global
   and regional bodies
4. Create a more resilient audit market through greater competition and choice
5. Develop the FRC as a respected, independent, and high performing regulator.

The review of listed company accounts

The key department for the review of the company accounts of listed companies is the Corporate Reporting Review (CRR), who are responsible for dayto-day activities related to the FRC’s statutory duty to oversee and improve corporate reporting quality in the UK. Their main responsibilities include: 

• Review of annual reports and accounts and Interim reports – these are reviewed for compliance with
  legal requirements and other relevant reporting standard. These reports and accounts are chosen
  for review based on a combination of risk based and rotational approaches.
• Interaction with companies – these mostly occur through formal letters, face to face, or Zoom meetings. Some aspects of these interactions may be made public, case details remain strictly controlled.
• Reporting findings – the FRC publishes quarterly Case Summaries based on recently closed reviews that raised substantive questions for companies. In addition, an Annual Review of Corporate Reporting outlines the CRR’s activity and findings over a year, including Thematic Reviews. This tends to be followed by a webinar held by the FRC which is recorded and published on their website.

The FRC have recently updated their Corporate Governance Reporting. In the past they have conducted a comprehensive review based on a sample of 100 companies from the premium listed market. The resulting report presents findings and is part of the basis in their decision-making process when developing the updated Corporate Governance Reporting.

The ongoing efforts to improve audit quality

From an Audit Regulation point of view, the FRC has three teams; The Audit Market Supervision (AMS), Audit Firm Supervision (AFS) and Audit Quality Review (AQR). Their aim is to hold audit firms accountable while also acting as an improvement regulator by identifying and sharing good audit practice to drive further
improvements.

The Audit Market Supervision team takes a cross market approach to areas of importance to audit quality and firm resilience, including conducting firmwide reviews of compliance with International Standards on Quality Management 1 and 2 (ISQM 1 and 2). The Audit Firm Supervision team is responsible for the overall supervision of PIE audit firms, drawing together the results of work undertaken by the Audit Market Supervision team and the Audit Quality Review team, as well as other areas of the FRC. They have implemented a tier system:

• Tier 1 firms - are already on an annual AQR inspection and firm wide review cycle
• Tier 2 firms - have ten or more PIE audits and other risk factors and are on a three-year review cycle
• Tier 3 firms - are on a six-year review cycle
• Tier 4 firms - who do not audit PIEs. 

The FRC’s key audit quality engancement initiatives

The Audit Quality Review team monitors the quality of audit work of UK firms that undertake statutory audits of PIEs and include detailed reviews of audit files and reports on their findings. 

The FRC has implemented several initiatives to enhance audit quality with the aim to contribute to a more resilient audit market: 

• Publication of a series of “What Good Looks Like” guidance: including What Makes a Good Audit, What Makes a Good Environment for Auditor Scepticism and Challenge, What Makes a Good Annual Report and Accounts and more.
• Conducting market research: to understand the audit market dynamics, including views from firms on entry, growth and exit in the market for smaller PIE audits and non-PIE audits.
• Audit firm scalebox: established to assist smaller firms in developing and maintaining high standards of audit quality as they enter and grow in the Public Interest Entities (PIE) audit market. This initiative provides valuable feedback to the firms on what constitutes good audit practices and extends to the FRC’s ambitions of being an improvement regulator.
• PIE auditor registration regime: enabling the FRC to impose conditions or undertakings on firms where quality concerns exist. Conditions may include requiring FRC approval before accepting new PIE audits, improving aspects of quality management systems and conducting additional quality reviews.
• Supervisions messages: which can be delivered through private annual supervisory letters and regular engagement with a firm’s leadership, emphasising the importance of prioritising audit quality. 

What more is needed? 

Following the King’s Speech on 17 July 2024 and the recent change of government, the Audit Reform is back on the legislative agenda. Plans to create the Audit, Reporting and Governance Authority (ARGA) remain part of the FRC’s future plans. The FRC’s Annual Report and Accounts for 2023/2024 highlight achievements and list agenda items for 2024/2025, including relocating their head office to Birmingham and revising the ISA (UK) 700 series. 

However, significant barriers to competition in the UK audit market, particularly for audits of Public Interest Entities (PIEs), persist. These include capacity constraints, recruitment and retention challenges, and regulatory requirements. The newly formed Centre for Public Interest Audit (CPIA), chaired by Baroness Margaret Ford, OBE, aims to enhance the quality and trust in UK PIE audits, sharing best practices and recommendations for improvements.

To keep pace with developments in corporate reporting, audit, and governance, entities and audit firms should have a detailed roadmap and audit quality strategy to plan for current and future changes. 

To stay ahead in corporate reporting, audit, and governance, and to adapt to legislative and regulatory changes, entities and audit firms need a robust roadmap and audit quality strategy. This approach ensures they are well-prepared for both current and future developments

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