FRC slates 'ineffective' transparency reporting at audit firms

The Financial Reporting Council (FRC) has slammed audit firms over the quality of their transparency reporting, describing it as ‘ineffective’ and no more than a 'marketing exercise', while most audit chairs did not even know the reports were produced

While the firms are failing to produce meaningful reports, the FRC review found a lack of awareness among investors and audit committee chairs, many of whom did not even know that such reports existed. An overwhelming majority (84%) of audit committee chairs were not even aware of transparency reports, while 15% of reports were not available on firms’ websites and five of the 33 firms reviewed did not prepare a report at all.

With the audit profession under huge pressure over recent audit failures, including Carillion and BHS, and a lack of trust from the public and lawmakers, the firms have been told to improve their reporting and stop treating transparency reports as a tick-box exercise.

EU and UK law requires auditors of public interest entities to publish a transparency report that includes details of their legal structure and ownership;  governance; internal quality control systems; and quality assurance and independence practices.

The FRC’s audit firm governance code (AFGC), which applies to audit firms that audit more than 20 listed entities, must include additional information in their transparency report, covering key performance indicators (KPIs), the role of independent non-executives, and an assessment of risks to the firm’s business model. 

The FRC review found that of the small number of audit committee chairs who had read the transparency report, most did so specifically in the course of an audit tender process. In addition, feedback from the few who were aware of such reports was that they were too long and overly positive to be useful.

Transparency reports were too long and overly positive to be useful

The review noted: ‘This is unsurprising given that many of the firms have seen the reports as a marketing opportunity rather than solely an accountability or compliance document. On that basis, transparency reporting by the large accountancy firms that perform audits is not currently effective.’

The regulator says it is concerned that many firms treat the reports wrongly as a marketing tool which damages their perception among stakeholders and limits their usefulness.

The FRC is calling on firms to reduce the length of their transparency reports and use them to explain the existential challenges they are facing in terms of delivering consistently high-quality audits, along with their assessment of how effective they are at delivering audits. 

The regulator says such an assessment would help users of the reports assess whether the firm’s latest actions are substantially different to those of the past and whether they can expect improved audit quality at that firm as a result.

This follows poor performance in the FRC's annual Audit Quality Inspections, which saw falling audit standards across the Big Four and mid-tier audit firms.  

David Rule, executive director of supervision at the FRC, said: ‘Transparency is vital to creating public trust in audit. Despite some improvements there is much more to be done to convince users to read and discuss these reports with the firms.

'Audit committee chairs and institutional investors should be fully aware that the reports exist. The most effective way to improve the reports is direct dialogue between stakeholders and the firms, and given this is publicly available information, there should be no barriers to this happening.’

FRC Transparency Reporting, issued 26 Sep 2019

 

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