FRC flags ‘importance of challenge culture’ in audit firms

The Financial Reporting Council has undertaken new analysis of its audit quality inspection results after discovering 80% of audits required improvement, effective challenging was a key component  

International Standards on Auditing (ISAs) require auditors to exercise appropriate professional scepticism.

But the most common finding in the Financial Reporting Council’s (FRC) audit quality reviews is that audit firms did not challenge the management of audited entities effectively on the significant judgements they had made.

Given the prevalence of key findings in this area, the FRC has undertaken a new analysis of its audit quality inspection results to identify recurring themes requiring audit firms’ attention, examples of good practice and to correlate these results with root cause analysis undertaken by the largest UK audit firms.

For more than 80% of those audits which required more than limited improvement, the effectiveness of challenge was a key audit quality consideration.

Firms have developed action plans and strategies to embed a challenge culture more consistently across their audit teams. The evidence obtained during the FRC’s recent review of audits of going concern following the Covid-19 crisis demonstrated that audit firms can do this well.

Operational separation

The FRC has set out principles for the operational separation of audit practices from the rest of the firm intended to ensure that people in the audit practice are focused above all on delivery of high-quality audits in the public interest.

The Big Four firms are working to implement this change fully by 30 June 2024 at the latest. 

Such is the importance of effective challenge by auditors, particularly given the increased uncertainties about the impact of Covid-19 on businesses and the economy, the FRC is announcing new initiatives to promote change.

In June 2021, the FRC will host a conference on the culture of challenge, entitled ‘Audit firm culture: Challenge. Trust. Transformation’ involving academics, other regulators and experts on culture from a wide range of sectors to share experience, ideas and good practice.

Building on the output from this conference, the FRC will undertake a thematic review on building a challenge culture in audit firms.  

The FRC’s executive director of supervision, David Rule, said: ‘Robust, focused and independent challenge is vital to a high-quality audit, particularly at a time of prolonged heightened uncertainty and operational challenges. It should be front of mind for audit teams as they advance their planning for December 2020 year-end audits.
 
‘Our recent review of audit of going concern showed that audit firms can get challenge right.  But they need to do more to embed a challenge culture, promoting audit quality in the public interest.

‘For this reason, we are announcing a conference to further examine the importance of a challenge culture and will be continuing to scrutinise firms in this important area.’

Further reading:

Financial Reporting Council review results

Zak Jakubowski |Reporter, Accountancy Daily [2019-2021]

Zak Jakubowski was a reporter at Accountancy Daily, published by ...

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