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FRC outlines measures to improve confidence in audit quality

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28 Apr 2014

The Financial Reporting Council (FRC) has today outlined a number of measures designed to “enhance audit quality and strengthen investor confidence”. The measures expand upon projects included within its current three year strategic plan (2013 – 2016) and have been announced in conjunction with the results of a survey commissioned by the FRC which looked at the perception of the value of company audit for a range of key audit stakeholders.

The survey ‘Improving confidence in the value of audit – a research report commissioned by the Financial Reporting Council’ (“the survey”) was undertaken by the FRC to “take stock of where audit is exactly” as the FRC was of the view that “confidence may have been on the decline for a number of years amongst key groups”.  A number of interviews were held across three groups reflecting the varying levels of direct involvement that stakeholders have in the audit process – from policy makers/influencers to auditors and accounting bodies.  Findings indicate that “the level of confidence that stakeholders have in audit has a very close relationship to their experience of the day to day audit process”. 

The survey indicates that “broadly speaking those stakeholders that are most closely involved with the day to day process of audit (financial directors, CFOs, audit firms, some accounting bodies and audit committee chairs) possess the highest confidence in audit and are least likely to advocate large-scale structural reform”.  This group is “confident in the quality of audit” and has a “high confidence in the audit service and auditor qualities” but understands the expectations gap that exists between “what the public understands and expects and what audit is actually designed to do”.  This group of stakeholders would “like to see a more competitive audit market and a better public understanding of the role of audit and its purpose”.   

That level of confidence is not shared by “those with a direct interest in the outputs of audit, but with less involvement in the day to day audit process” such as regulators and investors.  The survey highlights that these groups “have less confidence in the current audit arrangements and are likely to propose changes to the process, culture and competitive environment”.  The concerns of this group focus around auditor objectivity and independence which they see “as a significant issue” and these support measures to increase the “independence and transparency of the audit process, such as mandatory rotation, mandatory retendering or limiting non-audit fees”.     

Those such as journalists and academics are “the least confident group of stakeholders and are more likely to demand large-scale conceptual and structural re-assessment of audit”.  This group of stakeholders would like audit to be “redesigned to refocus on delivering more public protection”.     

In part response to the survey and to improve the quality of audit the FRC has announced: 

In the near to medium term, the FRC will focus on the expansion of its audit inspection work in line with recommendations from the Competition Commission, the implementation of the new EU Directive on statutory audit and enhancing the quality of bank audits, including through its thematic review of audits in this sector. It will also develop best practice guidance for audit committees on assessing audit quality; assess whether the ethical standards for audit remain fit for purpose; and review audit firm governance including whether the declining proportion of audit in the total business of the major audit firms poses unacceptable risk to audit quality and capacity. 

On a longer term horizon, the FRC will “assess whether any change to the scope of audit is necessary to meet investor expectations”.  Such examples may include considering the auditor’s role in connection with narrative reporting and non-GAAP measures

The FRC highlights that their measures are intended to:

  • Enhance transparency of audits;
  • Enhance the transparency of audit quality;
  • Enhance the relevance to users of the auditor’s role;
  • Manage auditor conflicts of commercial self-interest;
  • Address threats to audit quality from close auditor relationships with companies; and
  • Address public confidence in the audit of banks. 

The FRC has recently published their ‘Plan and Budget and Levies 2014/15’ which includes measures aimed at achieving these objectives during the next year. 

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