Review launched into role of auditors in serving the public interest

Out-Law News | 08 Oct 2018 | 4:31 pm | 3 min. read

The UK’s regulator of auditors and accountants, the Financial Reporting Council (FRC), has launched a “state of the nation” review into the audit profession in a bid to ensure audit better serves the public interest.

The FRC also released a report, Developments in Audit (50 page / 2MB PDF) which looks at the work the body has already undertaken to address the risks involved in delivering high-quality audits in the UK.

The review follows a spate of criticism of the role of auditors and the dominance of the ‘big four’ firms of Deloitte, EY, KPMG and PwC. FRC figures show the big four dominate the audit market for FTSE 350 companies, taking 97% of engagements and 99% of audit fees. Although smaller auditors have a larger share of the market below the FTSE 350, the big four still take a majority of audit fees.

Corporate governance expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, said: “This FRC review will add to the pressure for reform. It is difficult to believe that there will not be significant change in what audit firms do and how they do it within the next few years.”

The review will encompass the scope of audit; its relationship with future risk, viability and going concern; and the impact of new technology.

The FRC said it would test the effectiveness of rules on independence as part of a “comprehensive” review of auditing and ethical standards introduced in 2016. This review will include examining whether all consulting work for organisations audited by audit firms should be banned outright.

In the wake of several large-scale company failures, the FRC said it would develop proposals to strengthen requirements on auditors when considering whether an organisation is a going concern. It will look at areas including auditors’ responsibilities in assessing companies’ statements on long-term viability, and whether auditors should make public their views of these assessments.  

Earlier this year the government unveiled reforms to insolvency law which included granting the

Insolvency Service new powers to investigate directors of dissolved companies and to disqualify directors of holding companies who unreasonably sell insolvent subsidiaries.

The FRC is also undertaking a review of the work auditors do on the front half of companies’ annual reports to assess whether they are undertaking enough work to conclude these are not materially misstated. It said it would soon launch a “major review” of what information stakeholders need from corporate reports, and to what extent this information needs to be assured.

“Following the introduction of the 2018 UK Corporate Governance Code and the new company reporting regulations, this announcement by the FRC of a review into what is required from company reports threatens yet more upheaval,” Webster said.

“Regulators should not forget the need for time to allow existing reforms to bed down and be tested before they embark on yet more change,” Webster said.

The revised Corporate Governance Code was published earlier this year and will require companies to enhance their corporate reporting. The emphasis of the new code is on the relationship between business, stakeholders and shareholders, with the aim of improving corporate culture.  

The FRC also said it expected to adopt a revised standard covering the audit of management estimates and disclosures, which requires auditors to do more work when auditing significant accounting estimates, like the reporting of expected credit losses by banks, by the end of the year.

The FRC is itself the subject of an ongoing review led by Sir John Kingman on its governance, role and powers. The review, which is due to be completed by the end of the year, is considering the oversight, accountability and independence of the FRC, and whether the current legal basis of its role and powers is sufficient. It will also consider whether there is a case for extending the FRC's powers.

The Kingman review follows criticism of the FRC by parliament and the media for itself being slow to react in the face of repeated audit failures.

FRC chief executive officer Stephen Haddrill said: “This comprehensive reform programme addresses fundamental issues underlying falling trust in business and the effectiveness of audit, whilst also looking to ensure that the requirements on what companies say about themselves are fit for the future needs of stakeholders. If stakeholders are to have confidence in audit, they also need to have confidence in audit rules and regulation.”