The Financial Reporting Council (FRC) is to introduce a new approach to monitoring the top six audit firms, seeking evidence in five areas while also assessing candidates for key roles such as head of audit, the regulator confirmed at its annual priorities meeting
The FRC is currently consulting with the top six firms on its new monitoring and supervisory approach and is aiming to implement it during 2018/19.
As part of the new approach, the FRC will seek evidence in five areas including: leadership and governance; values and behaviours; business models and financial soundness; risk management and control; and audit quality.
The Audit Quality Inspections (AQI), which assess the quality of audit performance at PwC, Deloitte, KPMG, EY, Grant Thornton, BDO, will be used to test firm’s audit quality.
Melanie McLaren, executive director of audit and actuarial regulation at the FRC, had to stand in for CEO Stephen Haddrill as he was unable to attend this year’s priorities meeting due to illness. Sir Win Bischoff, chairman, was also absent as he had to attend a different engagement.
McLaren said: ‘The root cause of poor quality audit is often down to the governance and leadership of the firm.’
To address this problem the FRC said it will ‘set out our expectations of the experience, skills and attributes of candidates for key roles such as independent non executives, heads of audit and ethics partners at the big six firms’.
The regulator will feed back to senior management at the firms on how well they believe their appointees meet the various criteria. The FRC said: ‘We do not have specific powers in this regard and will look for the firms’ cooperation in doing so. In order fully to implement our new approach we will ensure that we have staff with the necessary skills, knowledge and expertise.’
The FRC is also consulting on changes to the stewardship code, aiming to publish a revised code by late 2018.
In last year’s priorities meeting the regulator announced that it would review its sanctions and Corporate Governance Code. The FRC confirmed that it is working on a way to implement the recommendations provided as part of the Clarke sanctions review, including a greater use of non-financial sanctions. The revised Corporate Governance Code is expected to be published in June 2018.
In 2018 the FRC is undertaking three thematic reviews on:
- Quality of reporting by AIM quoted and small listed companies;
- Impact of the implementation of new accounting standards; and
- Quality of disclosures on impact of Brexit.
Report by Amy Austin