On 2 December 2020, the Financial Reporting Council (FRC) shared new research that they commissioned, involving interviews with Audit Committee Chairs (ACCs), showing that “the development of standards for audit committees would support a more consistent approach to promoting audit quality” (“the FRC’s Research”).
2020 has been a year like no other, which is especially true for statutory audits considering the immense scrutiny that is being placed on audit quality. High-profile cases of continued failures of the audit process to prevent and detect accounting frauds such as Carillon, Thomas Cook, Wirecard, Steinhoff, and Autonomy have further impaired the trust placed by key stakeholders in audit quality and the integrity of audited financial statements, heightening the need for action.
On 2 December 2020, the Financial Reporting Council (FRC) shared new research that they commissioned—involving interviews with Audit Committee Chairs (ACCs)—showing that “the development of standards for audit committees would support a more consistent approach to promoting audit quality” (“the FRC’s Research”). Key observations noted within the FRC’s Research on audit committees’ roles regarding audit quality mirrored important themes addressed during FRA’s and Willkie Farr & Gallagher’s joint webinar on 14 July 2020.
The FRC’s Research shed some interesting observations on areas of focus for audit committees when tackling concerns of audit quality. While interesting, some of the observations are not new and have been highlighted repeatedly by many, including the FRC, CMA, BEIS, Sir John Kingman’s review, Sir Donald Brydon’s report and in past accounting and auditing failures.
Examples of key audit committee actions that serve to drive stronger audit quality mentioned in the FRC’s Research include:
- Place greater emphasis on the audit tendering process
- Challenge of the auditor’s planned audit approach
- Challenge of the auditor’s and management’s judgment and findings
- Encourage greater engagement by shareholders in the audits of the investee companies
- Verify that auditors have a good understanding of the company’s business and its sector
- Verify that auditors are able to identify key risk areas
- Maintain transparent and regular communication with the auditors
- Encourage timely escalation of issues to the attention of the audit committee
The FRC’s Research noted that views on, and approaches to, audit quality varied, further evidencing that the role of audit committees in achieving audit quality is by no means uniformly understood.
The FRC’s Research comes at an interesting time of the year when the annual financial close is fast approaching for many companies and year-end audits are already taking place or will commence imminently. With difficulties resulting from the challenges posed by the Covid-19 pandemic for companies and auditors alike, the FRC’s focus on improving audit quality and the recommendation for the introduction of standards for audit committees are important and will support a more consistent approach to audit quality.
This insight also features contributions from James Norden, a Forensic Accounting Manager based in FRA’s London office.