FRC publishes Thematic Review on Audit Culture

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11 May, 2018

The Financial Reporting Council (FRC) has published the results of its first thematic review on audit culture. The review highlights areas of good practice and areas where improvements can be made based on a review of practices at eight leading audit firms. The review provides a ‘snap shot’ of actions being taken by audit firms to “establish, promote and embed a culture that is committed to delivering consistently high quality audits”.

The FRC’s review covered the eight firms which have adopted the Audit Firm Governance Code and included 5 key areas, being design, implementation, monitoring, tone at the top, and independent oversight. In addition to the key areas they also considered some specific challenges to achieving an appropriate audit culture and what stakeholders such as investors and audit committee chairs thought of audit culture. The FRC found evidence that firms are investing “considerable” time and effort on their firm-wide culture.

The report includes examples for other firms to consider adopting, areas of common strength among the firms as well as key areas of improvement. The FRC indicates that “whilst progress made by individual firms may differ, there are a number of key areas where more should be done by the firms to establish, promote and embed an appropriate audit culture”.

These include:

  • giving additional prominence to audit specific behaviours and values within the firms ’ cultural design, including the fundamental principles of integrity, objectivity, independence and professional scepticism that underpin high quality audit;
  • ensuring that all audit partners and staff appreciate that a good audit is of significant societal value and helps to underpin transparency and integrity in business;
  • balancing the firms’ robust processes to sanction poor quality work or behaviour with better recognition of positive contributions to high audit quality;
  • further developing the firms’ root cause analysis (“RCA”) techniques to identify the behavioural or cultural factors that contributed to good and poor quality outcomes; and
  • improving the firms’ monitoring of how successful they are at embedding their desired culture, including the INEs of the firms being more proactive when performing their assessment of the steps being taken by the firms to embed an appropriate culture.

A number of other findings are included within the full report. The FRC have included a summary of key findings, both strength and improvements by key area of focus..

The FRC plan to report publicly within the next three years on the actions firms have taken in relation to the findings of the thematic review. It will also consider culture, where relevant, in its planned 2018/19 thematic reviews on audit quality indicators (“AQIs”) and will follow up on aspects of this thematic review through its new audit monitoring and supervisory approach.

The press release and full review are available on the FRC website.

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