The FRC has announced plans to enhance its monitoring of the six largest audit firms to avoid systematic deficiencies within firms’ networks, disruption in the provision of statutory audit services and instability in the financial sector.
The plan announcement comes after warnings issued and collapse of major infrastructure companies in the UK.
The FRC will set out its expectations of each audit firm and use evidence it gains to inform its supervision programme for these firms.
The introduction of such “supervisory” role undoubtedly will place more pressure on the FRC. Furthermore, the consequences, if any, the FRC reputation may face shall a client of the top six audit firms were to fail again under its watch.
The FRC will focus its attention on five key pillars that are critical to the stability of the audit firms and quality of audit work. These are:
- Leadership and governance;
- Values and behaviours;
- Business models and financial soundness;
- Risk management and control; and
- Evidence on audit quality, including from the FRC’s annual programme of audit quality reviews.
The FRC has begun work on monitoring risk reporting, contingency planning and IT security at audit firms and will report to the firms on its findings on all the five pillars. The results of the FRC’s inspection of audit quality by the firms will be published in firm-specific reports in June and summarised in the annual Developments in Audit report in July.
Melanie McLaren, Executive Director of Audit and Actuarial Regulation at the FRC, said,
As the UK’s competent authority for audit, the FRC is responsible for the regular monitoring and mitigation of risks in the audit market. The work of the Big Six audit firms is core to the integrity and transparency of UK capital markets and so it is vital that the FRC introduces a new approach to monitoring their stability and performance by focussing on aspects of their businesses that are critical to the provision of high quality audit. We will discuss with firms how well candidates for key leadership and governance roles such as Independent Non-Executives, Heads of Audit and Ethics Partners meet our expectations in terms of experience, skills and attributes. Where we do not have specific powers in this regard we will look for the firms’ cooperation