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FRC publishes a report on confidence in UK audit

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14 Jul 2016

The Financial Reporting Council (FRC) has today published a report (“the overview report”) that focuses on “assessing justifiable confidence in UK audit” and which “summarises the current ‘state of play’ as seen by stakeholders and the FRC; what has already been achieved and what still needs to happen”. The overview report is supplemented by a more detailed report of the FRC’s “audit related activities and evidence gathering”. Alongside the report, the FRC has also released the results of a YouGov commissioned report (“the YouGov report”) which looked at the levels of confidence in audit amongst stakeholders.

The overview report highlights that confidence in audit has improved.  The FRC comments: 

"On balance, there is a justifiably higher level of confidence in audit as a result of changes to independence requirements and the promotion of competition on the grounds of quality". 

Although the FRC highlight an improved level of confidence in audit, it indicates that “more needs to be done in terms of market competition and improving good practice in the profession”.  

The overview report identifies a number of “key influences” on confidence: 

  • As a result of regulatory changes, audit firms are seen as more independent and competing for audit engagements in quality grounds.  However the report highlights that there is still a level of “concern” that the FTSE 350 audit market is still dominated by the Big Four Firms.
  • Improved confidence is seen as a result of EU regulatory changes such as mandatory rotation and tighter provisions over the provision of non-audit services.  However the report does indicate that “there are concerns by some that the audit profession is becoming less attractive as a result of increased public and regulatory scrutiny”.  This, the report suggests, could deter future talent from joining the profession which may impact quality in the long-term.
  • Results from the FRC’s audit monitoring and those of the other Recognised Supervisory Bodies (RSB’s) support that audit quality in the UK is improving.  In its review into audit quality in 2015/16 of FTSE 350 audits, the FRC assessed 77% as requiring “no more than limited improvements”.  The FRC expects this figure to be 90% by the end of its 2016/19 strategy.
  • Large firms are now beginning to improve the effectiveness and efficiency of audits through the use of technology which the report highlights should “prompt further competition on quality”.  

The higher level of confidence in audit is supported by the report from YouGov.  The report follows up a 2014 survey which indicated varying degrees of confidence in audit depending on how close those stakeholders were to the day to day audit process.  The 2014 report indicated that those with less involvement in the day to day audit process did not share a high level of confidence.  Findings in 2016, show that “there is a sense of a higher level of confidence in audit than was seen in 2014”.  This is due improvements in audit since 2014 which have addressed various concerns raised by respondents in the 2014 survey.  However, like the FRC report, the YouGov report does highlight stakeholder concerns that would need to be addressed to further increase the level of confidence in audit.  

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