FRC to consider ban on consultancy work for audit clients

The Financial Reporting Council (FRC) is considering a potential ban on audit firms doing any consulting work for the bodies they audit as part of the regulator’s new strategic focus designed to ensure audit better serves the public interest

The FRC has published its Developments in Audit 2018 report which it describes as a ‘state of the nation’ review for audit in the UK. It highlights key themes and issues, including auditor impendence, viability, investor needs and audit quality, and the regulator says it is intended to provide a robust evidence base to allow for an informed debate about the future of audit.

Mike Suffield, acting executive director, audit regulation at the FRC told Accountancy: ‘We need to continue to press to make sure that the quality of the audit, as carried out currently to the current scope, needs to improve, but I don’t agree that we shouldn’t look at and seek to address some of the broader concerns about what audit covers, the assurance that stakeholders need from the information they are provided with, which is why we are highlighting the need to look at the wider role of the auditor.’

The report follows earlier analysis from the FRC which showed progress towards its target that 90% of FTSE 350 audits should require not more than limited improvements has stalled, and the improving picture shown in recent years has been reversed.

The report states that public confidence in audit depends on confidence in the independence of the auditor. The FRC says its review of the 2016 auditing and ethical standards will include determining whether further actions are needed to prevent auditor independence being compromised, including whether all consulting work for bodies they audit should be banned. The FRC will work closely with the Competition and Markets Authority (CMA) in this area.

In light of recent well-publicised company failures, the FRC will develop proposals to strengthen requirements on auditors when considering whether an organisation is a going concern. This includes whether the responsibilities of auditors in assessing companies’ statements on their longer-term viability should be enhanced and whether auditors should report publicly on their views of the realism of assessments made by companies. 

In addition, the FRC is undertaking a review of the work auditors do on the front half of the annual report to assess whether auditors are undertaking enough work to conclude it is not materially misstated. The FRC says it will shortly launch a major review of stakeholders’ needs for information in corporate reports and will consider to what extent such information needs to be assured.

Stephen Haddrill, CEO of the FRC said: ‘This comprehensive reform programme addresses fundamental issues underlying falling trust in business and the effectiveness of audit, whilst also looking to ensure that the requirements on what companies say about themselves are fit for the future needs of stakeholders.  If stakeholders are to have confidence in audit, they also need to have confidence in audit rules and regulation.’

Regarding audit quality, the FRC’s strategic programme points out it has adopted an enhanced programme of audit firm monitoring, which includes strengthening its enforcement capacity so it can conclude cases more quickly and revising its sanctions framework to levy penalties that reflect the gravity of the issue.

Suffield denied that the FRC had toughened its stance in the face of political and public criticism during the latest round of audit quality reports, which showed an overall dip in quality compared to previous years.

‘We have spent a lot of time making sure that we are being consistent in what we do over time in order to be fair to the firms and then be able to report with a degree of authority. It is absolutely not about us being harder, these were the results from our inspections this year,’ he said.

Suffield refused to be drawn on the merits of potential solutions to concentration in the audit market, saying: ‘This isn’t a simple problem. All the firms have been developing proposals, conscious that the Competition and Markets Authority has this on its radar, and we will be very interested to see where the CMA ends up.

‘The ICAEW has been very active in facilitating discussions among the firms, but the FRC has not expressed a view on the individual proposals that have been put forward, because it is important that the CMA gives them due consideration.’

According to the FRC review, mandatory tendering, and a maximum tenure for auditors, has had a significant impact. Nearly half of FTSE 350 auditors were in place for five or less years in 2017, as compared to fewer than one quarter in 2012.

However, the regulator concedes ‘there has been no diversification of the UK audit market’. Big four firms have increased their market share in the FTSE 350 and also dominate fee income in every category of engagement. 

Developments in Audit 2018 is here.

Report by Pat Sweet

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