The FRC’s CEO, Sir Jon Thompson, said that while some progress on audit quality had been made in recent years, significant improvement is still required. Thompson warned it would take time and an ongoing commitment from firms to improve standards.

The FRC’s report What Makes a Good Audit? sets out the regulator’s expectations of auditors - from the planning phase of an audit right through to how audit firms are being led and run. It identifies six key attributes it believes contribute to the running of high-quality audit practices and includes a range of examples of good practice identified through recent audit quality inspections and supervisory work. 

Areas of focus include the culture, governance and leadership of the firms, alongside their investment in well-qualified people, training and processes. It also includes the key elements that contribute to high-quality individual audits, from the planning phase through to the delivery and completion of audits.

“Trust and integrity have been the cornerstones of Britain retaining its rightful place as a global centre of investment, innovation and growth where investors can hold businesses properly to account for the benefit of all stakeholders. It is clear that the unacceptable level of audit quality in recent years has contributed to undermining this trust,” Thompson said.

The criticism comes following a series of high-profile audit failures, including the collapse of companies including retailer BHS and Carillion and widespread calls to enhance audit quality. A government consultation on far-reaching reform of the audit and corporate governance regime is currently underway, and Business Secretary Kwasi Kwarteng has outlined how plans to break up the dominance of Big Four audit firms and require large businesses to be more transparent about their performance would help to avoid company failures and reinforce the UK’s reputation as a world-leading destination for investment.

“Ahead of wider reform of the sector, this report is an important contribution to the debate on what good-quality audit should be and how it will lead to better outcomes for the UK’s corporate ecosystem,” Thompson added.

While the paper focuses on the role of audit firms, Thompson stressed the important contribution that the management of the audited entity and those charged with governance can make to a robust and comprehensive audit. “A well-governed company, which reports transparently and has clear and robust evidence that underpins that reporting, as well as effective internal controls, are all important in underpinning a high-quality audit,” Thompson says. 

‘Whole-system approach’ is needed

John Boulton, ICAEW’s Director of Policy welcomed the guidance as a positive step in improving audit quality. “We’re pleased that the FRC has taken this step towards helping auditors understand what it considers to be a good audit.”

“While it will be useful for auditors to understand what the regulator is looking at, we’d like to see the FRC develop its guidance to provide more tangible examples of good practice, and of where things have gone wrong, to drive further improvements,” Boulton added.

Nigel Sleigh-Johnson, ICAEW’s Director of Audit and Corporate Reporting, agreed that focusing on auditors in isolation would be insufficient to promote public confidence in audit. “ICAEW has consistently pointed out that a whole system approach to reform is needed, with a new regulator and changes across the corporate reporting system. Audit quality is not just about auditors, but about other players in the system too.”

· ICAEW published a thought leadership essay on audit quality earlier this year and is developing a range of resources to provide practical assistance to member firms on audit quality. For more information click here.