FRC builds case for audit committee standards

The Financial Reporting Council (FRC) says research carried out with audit committee chairs (ACCs) indicates a need to develop standards for audit committees in order to ensure a more consistent approach to promoting audit quality

YouGov conducted 50 qualitative depth interviews with ACCs of public interest entities exploring their views on, and approach to, audit quality. A number of interviewees were the chair of more than one audit committee so in total 73 companies were covered by the sample, 22% from the FTSE 100 and 40% in the FTSE 250.

The study found that often the ACCs expressed a desire to improve their understanding of what makes a good audit, and particularly called for clarity on the scope of audit to aid them in this.

The FRC said such findings suggest that while some audit committees may be very focused on the quality of an audit, there could be inconsistencies in how they go about promoting audit quality. This lends weight to proposals for reforms in the audit sector, including the introduction of standards for audit committees.

For many ACCs, the lead audit partner was synonymous with quality. The ACCs reported a good audit partner would have an understanding of the business and its sector, the ability to identify key risk areas and a sensible approach to handling them, along with a focus on timeliness in terms of raising issues and completing work, and good communication skills.

Some ACCs mentioned challenge and scepticism as key to ensuring a high-quality audit, although these were not named as key attributes for a good auditor by all.

 The research found that ACCs placed great emphasis on the audit tendering process to ensure a high-quality audit, and on challenging their auditor over how their planned audit approach would deliver quality.

Challenge was less apparent in relation to auditors’ judgements and findings, and few ACCs mentioned regularly challenging company management as well as the auditors during the audit process.

 On developments with the audit firms’ transparency reports, including greater reporting of audit quality indicators (AQIs), many ACCs said they did not consider AQIs in detail and thought they could be made more useful.

A majority of ACCs suggested audit firms’ transparency reports were fairly ‘boilerplate’.

Many of the ACCs reported that the FRC’s audit quality review (AQR) reports were more informative in supporting their work on audit quality although these, and AQR ratings, might not be a major consideration when selecting an auditor. Many ACCs said they would welcome further information and support from the FRC to help in their work on audit quality.

In terms of receiving external support to help drive challenge, the majority of ACCs suggested shareholders were not engaged in the audits of the companies they invested in, citing either lack of accessibility or interest in the process.

Mark Babington, FRC executive director of regulatory standards, said: ‘Today’s research reveals there is a lack of consistency in how to approach audit quality with insufficient focus on challenge of management and professional scepticism.

 ‘Delivering high standards of audit, corporate governance and reporting remains a key focus for the FRC and we are working closely with the government to take forward proposals that will better meet the needs of stakeholders and users of accounts.’

The 2019 Competition and Markets Authority (CMA) study of the statutory audit services market recommended increased regulatory scrutiny of audit committees to help improve audit quality.

Sir Donald Brydon's review into the quality and effectiveness of audit recommended that audit committees invite shareholders to suggest areas for the audit plan, ACCs negotiate the audit fee, and audit committees publish a three-year rolling audit and assurance policy as well as minutes of their meetings.

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Audit Committee Chairs’ views on, and approach to, audit quality

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