The UK’s audit watchdog has announced a new strategic plan to address “falling trust in business and the effectiveness of audit”, after a series of scandals in the sector.
The Financial Reporting Council (FRC) released its ‘Developments in Audit’ report today, raising concerns over public trust in the profession, and constricted competition at the top end of the market.
Mike Suffield, the FRC’s acting audit head, told City A.M. the sector was facing a growing challenge to maintain public trust. “The audit expectations gap feels like it’s wider than it’s ever been,” he said.
The FRC plans a series of measures including heightened monitoring, new standards for determining risks and a review of auditing ethics to tackle criticism.
The audit sector is currently under intense scrutiny and pressure, as the competition watchdog looks at the dominance of the Big Four auditors – Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC) – following their involvement in a series of scandals including the collapse of construction giant Carillion.
The FRC itself is the subject of a government-launched review, led by Sir John Kingman, which began after it was labelled “toothless” by two powerful parliamentary committees. Kingman is expect to report by the end of the year.
“We recognise there’s been a lot of criticism of the organisation, so we look forward to that report being published,” Suffield said.
Suffield said he expected the market could be successfully changed to allow competitor firms to get a look-in at the biggest audit contracts, adding that smaller groups were already capable of taking on audits at those top firms with simpler structures. “What is really challenging for them is the global groups,” he said.
The FRC’s report scrutinised a wide sweep of sector developments, homing in on issues of audit quality and competition.
It repeated the FRC’s criticism of KPMG, first made over the summer, saying the firm’s audits had seen an “unacceptable” deterioration in quality. Suffield said he hoped to see KPMG improve, but did not anticipate an immediate turnaround.
The report analysed the impacts of previous reviews by the EU and the now-defunct Competition Commission, which introduced mandatory rotation of auditors for listed firms. It found that although the change had produced significant reduction in overall audit tenures, but had failed to bring about diversification – actually resulting in even more audit contracts ending up with the Big Four.
It said that current procedures for monitoring audit quality were deemed sufficient by the FRC, but that as technology’s impact on audit grows, it could require new methods of monitoring.
The FRC found growing worries about audit quality among firms had grown. “High-profile failure has taken its toll,” the report said, “with a majority of those we spoke to telling us they were more concerned about audit than a year ago.”
“Many also expressed frustration that issues impacting on audit quality and confidence in audit continually recur.”