The Financial Reporting Council (FRC) is to tighten its monitoring of the six largest audit firms, which will include analysis of the skills and attributes of candidates for key roles such as independent non-executives, heads of audit and ethics partners
The regulator first outlined plans to take a tougher line with the top six firms in its 2018/19 plan and budget, when it highlighted the lack of competition at the top end of the audit market as a serious concern.
This means that not only will the Big Four, PwC, Deloitte, EY and KPMG, be in the sights of the regulator, but it will also increase scrutiny of the largest mid-tier firms, Grant Thornton and BDO.
The FRC says the new approach is designed to avoid systematic deficiencies within firms’ networks, disruption in the provision of statutory audit services and instability in the financial sector. It will set out its expectations of each audit firm and use evidence to inform its supervision programme for these firms.
The work monitoring risk reporting, contingency planning and IT security at audit firms has already started. The results of the FRC’s inspection of audit quality - the annual audit quality reports - by the firms will be published in firm-specific reports in June and summarised in the annual developments in audit report in July, and it will also provide private feedback to firms.
In a briefing note, the FRC states: ‘As part of our focus on leadership and governance we will set out our expectations of the experience, skills and attributes of candidates for key roles such as independent non-executives, heads of audit and ethics partners at the Big Six firms.
‘We will assess and feed back to senior management how well we believe their appointees meet these criteria.
‘We do not have specific powers in this regard and will look for the firms’ cooperation in doing so. In order fully to implement our new approach we will ensure that we have staff with the necessary skills, knowledge and expertise.’
The regulator says its focus will be on the five key issues identified as critical to the stability of the audit firms and quality of audit work, including leadership and governance; values and behaviours; business models and financial soundness; risk management and control; and evidence on audit quality.
Melanie McLaren, executive director of audit and actuarial regulation at the FRC, said: ‘The work of the Big Six audit firms is core to the integrity and transparency of UK capital markets and so it is vital that the FRC introduces a new approach to monitoring their stability and performance by focussing on aspects of their businesses that are critical to the provision of high quality audit.
‘We will discuss with firms how well candidates for key leadership and governance roles such as independent non-executives, heads of audit and ethics partners meet our expectations in terms of experience, skills and attributes. Where we do not have specific powers in this regard we will look for the firms’ cooperation.’
