The UK Financial Reporting Council (FRC) advised companies not to publish the results of their Audit Quality Report, contrary to recommendations made by the Competition and Markets Authority (CMA) earlier this year.
Further to its investigation into the Statutory Audit Services Market, the CMA had recommended that FTSE 350 companies that had undergone an FRC audit review should publish the key findings of that review, as well as the grade assigned, in their annual report and accounts. The CMA noted that the disclosure should also include information on how the company and its auditors plan to address the issues raised.
The remit of the CMA, an independent government department formerly known as the Competition Commission, is to promote competition for the benefit of consumers and to ensure that markets function well for consumers, businesses, and the economy. The FRC is an independent regulator responsible for promoting corporate governance and also is the lead audit regulator in the UK.
In April, the FRC announced it would hold a consultation on these recommendations beginning in late 2015 so that any necessary changes could be included in the 2016 update of the UK Corporate Governance Code. Since a number of audit committees had expressed a desire to implement the CMA recommendations prior to that date, the FRC issued further guidance in a statement titled “Transparency of AQR Findings.”
Although it acknowledges that implementation of the CMA recommendations would significantly increase the transparency of the FRC’s inspection of individual audit engagements, the council stated that audit committees should not disclose the AQR inspection grade.
In the FRC’s view, doing so could lead to misunderstanding by users of audit committee reports of the scope or significance of the review as well as its relevance to the quality of the financial statements. The possibility that user confidence in the audited financial statements might be negatively affected also was raised.
“The current grading system was designed to help audit committees understand the significance of the issues identified and their implications,” the FRC said in the statement. It goes on to explain that “the grades are not intended to provide an assessment of the reliability of the financial statements as a whole or the audit opinion and we are concerned that the publication of such a ‘single figure’ could mislead and distract attention from the key issues identified by the committee.”
The FRC also said: “Where a company’s audit has been reviewed by the AQR, the FRC would expect audit committees to discuss the findings with their auditors and consider whether any of those findings are significant for these purposes and, if so, to make appropriate disclosures. Such disclosures should be in the audit committee’s own words and deal with what action they and the auditors plan to take.”
“Our advice to audit committees is that in accordance with the code they should report how they have made their own assessment of the effectiveness of the audit process,” the FRC said.
The 2015 consultation will give further consideration to the issue of whether the grades should be published. It will also address other changes to the UK Corporate Governance Code that might be needed as part of the implementation of the CMA’s report and the EU Audit Directive.
Related CGMA Magazine content:
“UK FRC Announces Effort to Boost Investor Confidence in Audit Quality”: The UK’s Financial Reporting Council published details of initiatives to promote “justifiable confidence” in the quality of audit in response to declining stakeholder trust in the process.
—Samantha White (firstname.lastname@example.org) is a CGMA Magazine senior editor.