The UK’s Financial Reporting Council (FRC) has published details of initiatives to promote “justifiable confidence” in the quality of audit in response to declining stakeholder trust in the process.
The regulator designed a package of measures to improve audit quality and increase the value of auditor reporting to investors, with the ultimate goal of shoring up public confidence in the UK’s corporate governance and reporting. These measures include retendering, enhanced and extended auditor reporting and providing the results of audit quality inspections directly to audit committees.
The programme comes in response to the findings of an FRC survey conducted in 2013 to benchmark the degree of confidence key stakeholders have in the audit process.
The survey found that while those working in the field are generally confident in the value of audit, the majority of stakeholders, investors in particular, have less confidence in it. Respondents in this group, which also encompasses regulators, civil servants and business associations, see a need for greater transparency in auditor reporting and called for a more open and competitive appointment process, including mandatory rotation and capping of non-audit fees. The current concentration of the audit market was a primary factor in their lack of trust.
Over the next 12 to 18 months, the FRC will develop guidance to help audit committees evaluate audit quality and assess whether the ethical standards for the audit process remain fit. A review of audit firm governance will examine whether the declining proportion of audit work in the total business of the major audit firms poses an unacceptable risk to the quality and capacity of such work.
In the longer term, the council will determine whether any change in the scope of audit is required in order to meet investor expectations.
—Samantha White (firstname.lastname@example.org) is a CGMA Magazine senior editor.