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FRC issues statement on how it intends to implement the CMA's recommendations regarding AQR transparency

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20 Nov 2014

The Financial Reporting Council (FRC) has today released a statement setting out how it intends to implement the Competition and Markets Authority (CMA) recommendations around disclosure of Audit Quality Review (AQR) findings by FTSE 350 companies.

In 2013 the Competition Commission recommended that the FRC should require audit committees to publish the grade given to the audits inspected by its AQR team.  The FRC announced in April 2014 that it will consult on this recommendation in time for updates to the UK Corporate Governance Code to be made in 2016.  However, some Audit Committees have indicated that they may wish to implement aspects of the CMA’s recommendation in advance of these Code changes and so today's statement includes advice from the FRC on how to go about doing this.  The FRC advises that:

  • In considering how to report on an inspection it is important that companies do not give false assurance to investors or raise unnecessary concerns.
  • It is supportive of investors having additional and better information about the quality of an audit. However, the AQRs’ work is focussed on the audit and is not designed to comment on the contents of the report and accounts.  It also generally covers only selected aspects of the audit and is not designed to confirm the audit opinion.
  • Where a company’s audit has been reviewed by the AQR, the Audit Committee should consider whether any of the findings are significant for the purposes of putting together their report on how they have assessed the effectiveness of the audit process (as required by the Code) and, if so, make appropriate disclosures.  The FRC would expect audit committees to discuss the findings with their auditors as part of this process.
  • In making their report, Audit Committees should not disclose the inspection grade.  The FRC is concerned that the publication of this could be misleading, as the current grading system was designed to help audit committees understand the significance of the issues identified and not intended to provide an assessment of the reliability of the financial statements as a whole or the audit opinion.

In line with this advice, the FRC has stated that it will waive its confidentiality rights to the information, other than the grade awarded to the audit, contained in the AQR reports for the sole purpose of allowing the company and its auditor (who also has confidentiality rights) to determine how and what information arising from the inspection is reported to shareholders.

The full statement can be obtained from the FRC website.

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