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March 2, 2020

FRC calls for operational separation

By Zoya Malik

The FRC has written to the UK’s largest audit firms setting out the regulator’s expectations for operational separation to bring about audit quality improvements and audit market resilience.

Everyone, not just in the UK but globally is affected in some way by the quality of external audits that serve multiple functions – that is to give a picture of a company’s financial performance, pick up on any warning signs, create market confidence and to protect shareholders and customers.

In the UK, there have been well publicised short comings in how audits have been performed with resultant corporate failures and the eventual collapse of construction firm Carillion and retailer BHS, and now according to the regulator, it’s down to the BIG firms and the industry to address and enhance existing frameworks to improve audit quality and transparency. 

What’s proposed is to split audit from non – audit business to avoid a conflict of interest. This conflict could occur if an auditor is tasked with providing an independent error-free audit of a big business and then if that same auditor is also performing services for the company or person they are auditing.

Claire Lindridge, FRC’s Director of Audit Firm Monitoring and Supervision (AFMAS) said, “The FRC’s focus is to ensure audit firms put audit quality front and centre, with new independence and financial transparency guidelines to support this.

"We expect the firms to put in place independent governance for the audit practice and ensure that the audit practice is appropriately ring fenced from the rest of the firm so that financial results are clear and transparent.”

When approached by IAB for its position on audit and non-audit business separation, a spokesperson from EY commented,EY continues to believe that the right set of comprehensive changes is needed to enhance protection for UK pensioners, employees and investors. We are reviewing the FRC’s proposals and the implications for our business and remain committed to playing an active and constructive role in their development. While the detail of these proposals is still to be established, careful consideration will need to be given to the impact on audit quality, attractiveness of the profession, resilience and financial stability”.

A representative from PwC stated, "We are committed to playing our part in introducing changes which improve audit quality, help rebuild confidence in audit and the corporate reporting system, and ensure the UK remains a leader in audit.  We will engage constructively in discussions with the regulator and other stakeholders."

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