The Financial Reporting Council (FRC) has published its annual inspection findings for Tier 2 and Tier 3 audit firms, alongside the actions these firms must prioritise to deliver high quality audit and contribute to a more resilient audit market.
As part of the FRC’s 2022-2023 inspection programme of Tier 2 and Tier 3 firms, which audit Public Interest Entities (PIEs), the FRC inspected 13 audits at 11 of these firms. Only 38% of audits reviewed required no more than limited improvements, 24% required more than limited improvements and a further 38% required significant improvements. While these results represent only a small risk-based sample, the number of audits requiring significant improvement is unacceptable. The FRC continues to identify deficiencies in the audit of judgements and estimates, and going concern, both of which require audit teams to demonstrate robust professional scepticism.
Tier 2 and Tier 3 firms must prioritise audit quality improvements and respond swiftly.
This includes investing in their audit methodology, human resources and audit quality functions, learning from things that went wrong or went well, and seeking to embed a culture that recognises and prioritises audit quality.
To improve resilience and competition in the PIE audit market, the FRC wants these firms to be able to increase the number and complexity of the PIEs they audit and is taking actions to support them to grow in a way that is consistent with the delivery of high-quality audit.
Examples of forward-looking supervision actions being taken by the FRC include:
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- Establishing the Audit Firm Scalebox to help firms develop and maintain high standards of audit quality as they enter and grow in the PIE audit market. This has already provided valuable feedback to firms on what good looks like and extended our approach as an improvements regulator.
- The new PIE Auditor Registration regime, which allows the FRC to impose conditions or undertakings on firms where quality concerns exist. Such conditions or undertakings have now been placed on over 30% of PIE audit firms.
- Examples of common conditions imposed include requiring: (1) FRC approval before accepting new PIE audits so that the growth of a firm’s PIE audit portfolio can be responsibly managed; (2) improvements to aspects of a firm’s system of quality management; and (3) additional quality reviews to be conducted.
- Delivery of assertive supervision messages in our private annual supervisor letters and regular engagement with firms’ leadership.
Commenting on the findings, FRC executive director of supervision, Sarah Rapson, said: “The FRC’s ongoing supervision of the largest audit firms has helped to deliver audit quality improvements at those firms, but it is important that all firms step up to improve the overall health and resilience of the audit market.
“The FRC has developed a comprehensive, forward-looking supervision approach to ensure audit quality is prioritised at the Tier 2 and Tier 3 firms, including now imposing conditions or undertakings through our PIE Auditor Registration process where we have audit quality concerns, and providing support where appropriate.”