The high profile collapses of companies such as Carillion and BHS have reignited the debate about the effectiveness of statutory audit. In the FRC’s recently published report, Developments in Audit, the FRC grapples, not for the first time, with how to ensure that audit properly serves the public interest. Auditors can expect some pretty radical changes.
The FRC strategic review is running in parallel with the Competition and Markets Authority (CMA) review of the sector. Whilst the focus of the FRC review encompasses quality, viability and independence, the CMA review is centred upon the lack of competition in the auditing work of the FTSE350; in the last year, 98% of the FTSE350 companies in the UK were audited by one of the Big Four accountancy firms.
What exactly can those in the audit world expect from the FRC ‘state of the nation’ review of audit in the UK?
The FRC needs to be able to reassure the public that the work of auditors remains truly independent. To that end, they plan to carry out a comprehensive review of the 2016 Auditing and Ethical Standards to test the effectiveness of the current rules on independence. The review aims to establish if further action is needed to prevent auditor independence being compromised. A possible consequence may be a complete ban on the sale of non-audit services to audit clients.
The FRC plan to develop proposals to impose strengthened requirements on auditors’ considerations as to whether a company is a ‘going concern’. This plan includes enhanced responsibilities on auditors in assessing the company’s statements of their longer term viability and public reporting on their view of the realisms of the assessments made by the company.
The FRC are carrying out a review of the work auditors do on the front half of the annual report to determine whether auditors are undertaking sufficient work to conclude it is not materially misstated. The FRC reports that they will shortly launch a major review of stakeholders’ needs for information in corporate reports and will consider to what extent such information needs to be assured.
The FRC has adopted an enhanced programme of audit firm monitoring, this following high profile and widely reported deteriorations in audit quality. Such monitoring has included assessing the suitability of key appointments in major accountancy firms to ensure high quality leadership with the ability to challenge poor corporate behaviour by those being audited. Stephen Haddrill (CEO of the FRC) recognised in his speech regarding Developments in Audit on 18 October that such monitoring took the FRC, ‘beyond the limits of our statutory authority’ but opined such powers should be extended.
The FRC has also strengthened its enforcement capacity to conclude cases more quickly. It is also considering a revised sanction framework to levy penalties that reflect the gravity of the issue at hand. Sanctions in recent years have included a 15 year ban and £325k fine against a senior partner at one of the Big Four, who signed off the audit on BHS prior to the company’s collapse. It was alleged that the partner conducted no more than two hours of work on the audit prior to signing it off and the majority of work was delegated to a junior colleague with approximately one year of audit experience.
Stephen Haddrill summarised the FRC’s agenda as, ‘to strengthen quality; restore confidence in the audit market and especially in independence; strengthen work on viability to rebuild trust; and enhance the value of corporate information to all stakeholders.’ The product of this agenda will clearly be significant and far-reaching reform. There was a focus on audit serving the public interest in Haddrill’s recent speech: ‘Audit exists to counterbalance the asymmetry between what management and investors know about the performance of the business.’ In turn, according to Haddrill, investors, the capital markets, customers and employees are assured. It is important those who conduct audit work are fully aware of the FRC’s criticisms of current audit practice and plans for the future to ensure they fall on the right side of the hard line the FRC is taking to ensure the public interest is better protected going forward.