Regulator to beef up audit quality indicatorsby
The largest UK audit firms may soon have to publish audit quality indicators under new proposals published by the UK accounting regulator.
The Financial Reporting Council (FRC) launched the consultation into audit quality indicators (AQIs), which would see large audit firms having to publicly provide stakeholders comparable indicators on the perceived culture within the firm, staff workloads and the level of partners’ involvement in individual audits.
The regulator reasoned in the consultation that public reporting of firm-level AQIs would “broaden the range of information regarding audit quality”, which has been frequently requested from stakeholders.
“Being able to make comparisons between firms on AQIs beyond external inspection results, including between the largest firms and the challenger firms, and then discuss these factors with the firms themselves, will help audit committees make a more informed choice when selecting an auditor,” the FRC said in the consultation document’s executive summary.
However, critics have argued that the regulator “misses the point” in this consultation, since “audit is the expression of an opinion, not the completion of a process”.
The 11 proposed AQIs
The regulator lists 11 proposed AQIs across five different areas. Below are the FRC’s proposed indicators (not including any additions or alternatives).
Under the proposals, audits for public interest entities (PIE) and non-PIEs would have to report these AQIs. Although the regulator could see the number of firms brought into the scope increasing as the government expands the definition of PIEs as part of its audit reform.
While audit firms publish some AQIs in their transparency reports, the FRC said the proposed changes would help Audit Committee Chairs make informed comparisons between firms.
According to the FRC, comparisons between firms are currently much harder because the metrics firms use are “not necessarily defined in precisely the same way” and “some firms are still developing their suite of AQIs for external reporting”.
If the proposals go ahead as set out in the consultation, the FRC said the new AQIs will take effect from 1 April 2023 and would cover the period 1 April to 31 March for each year. This timeline would align with the FRC’s inspection cycle and the regulator’s inspection and supervision reports on tier one firms in the summer of 2024.
Why are the indicators used?
The FRC outlined the need for AQIs in the consultation, noting that they provide information on “factors that contribute to audit quality at the firms, to help them make an informed choice when selecting an auditor and throughout the subsequent audit engagement”.
The regulator also said they enable stakeholders to assess firms “on a more consistent basis” and “to have rich conversations about audit quality and correlated factors with audit firms”.
Will decision-makers take any notice?
While the FRC said in the document that the indicators are “another way to stimulate discussions around audit quality”, Richard Murphy has cast doubt on the usefulness of them. The professor of accounting at Sheffield University Management School said that the FRC is asking if audit firms have the right processes, but the true indicator they should be asking is: “Did the auditor ask the right questions?”
“Audit is the expression of an opinion, not the completion of a process,” said Murphy. “[This consultation] is focused on process and not opinion, therefore the FRC missed the point.”
He added, “The emphasis is still on auditing the garbage presented to them and not asking is the data what the stakeholder needs? A beautifully documented audit is still a failed exercise.”
Murphy concluded that while the consultation is very detailed, everyone will “remain as confused as ever”. He said that remarkably few will understand the indicators, such as why there are a vast number of juniors undertaking the audit or why the partner doesn’t do a lot until the end of the audit.
Ultimately, he questioned whether the chosen indicators will actually lead to any decision-makers appointing another audit firm. “It might be of interest to an audit committee, but the changes of appointments in a year is small and most will stick with the devil they know.”
Audit under the spotlight
The focus on AQIs is the latest move from the regulator in the tightening of audits. In April the FRC launched a new governance code to strengthen its independent oversight, and then followed that up days later with confirmation that it will take control of audit registrations from September.
The FRC is toughening up its oversight of the audit sector as it gradually transitions into the new Audit, Reporting and Governance Authority (ARGA) as the statutory regular. The government’s recent response to the audit reform white paper outlined that ARGA will have increased powers to sanction accountants in public interest cases and will oversee the professional bodies’ regulation of the profession.
The continued scrutiny of the audit sector follows a number of high-profile scandals involving the Big Four firms, where the collapses of Carillion and BHS are now used as shorthand for audit failure.