The UK’s Financial Reporting Council (FRC) has called for Audit Quality Indicators (AQIs) to be used more effectively so that more timely corrective action can be taken.
The FRC’s thematic review into AQIs found that audit firms are using these indicators to highlight audits which need improving and to promote good practice.
However, the FRC found that most monitoring of AQIs across the largest audit firms takes place after audits are completed, rather than prior to or during the process. The regulator stressed that audit firms must focus on ‘forward-looking and granular AQIs to ensure they are identifying early interventions which could prevent deficiencies in audits’.
The FRC review also looked at how AQIs are publicly reported. Some areas which were found to need improvement included:
- AQIs reported in the UK are concentrated on five areas whilst other countries require firms to report on eight or more.
- Publicly-reported AQIs are not easily accessible or comparable across firms.
- Few Audit Committee Chairs and investors interviewed for the report were aware of published AQIs.
Some countries have adopted initiatives where audit teams report AQIs specific to individual audits directly to Audit Committees and the FRC is to look at whether a similar initiative in the UK would improve Audit Committee engagement.
FRC executive director of supervision David Rule said: “Audit firms need a relentless focus on improving audit quality. Our review found that audit quality indicators, if used correctly, can help firms take decisive and immediate actions to improve audit quality.
“Public reporting of a consistent set of audit quality indicators is required to provide companies and investors another window on audit quality. It is clear that improvements are needed in this area and the FRC will be consulting on proposals in due course.”
Deloitte UK deputy CEO and managing partner of audit & assurance and public policy Stephen Griggs said: "Audit quality underpins everything we do and remains our absolute priority. We support the effective use of Audit Quality Indicators and will consider the findings of today’s FRC report to continue improving how we measure it. We remain steadfastly committed to delivering high quality audits that support the capital markets, our wide ranging stakeholders and our public interest role.”
A spokesperson for EY said: "We welcome the FRC’s thematic review and will be carefully considering the findings as part of our continuous focus on audit quality. Audit plays a vital role in the functioning of the capital markets, providing trust and confidence to stakeholders, and we are committed to delivering high-quality audits consistently."