In light of continuing problems with the quality of audit and the latest findings from the annual inspection cycle, the FRC has decided that these firms require more support and closer supervision as part of the overarching objective to widen audit competition.

Tier 2 and Tier 3 firms audit only 13% of listed companies and other public interest entities (PIEs) within the FRC’s regulatory scope. However, their share of the market has recently grown from 9% to 13%, partly as a result of the larger Tier 1 firms de-risking their audit portfolios.

The FRC’s inspection findings at Tier 2 and Tier 3 firms identified significant shortcomings in audit quality with a third of audits requiring substantial improvements. Weakness in the application of professional judgment and scepticism were the most common areas of poor performance but there were also problems with revenue recognition and going concern.