The Chief Executive of the Financial Reporting Council (FRC) has welcomed the new Centre for Public Interest Audit (CPIA) as an “important development for all of us that have an interest in the health, the integrity, the vibrancy of the public interest audit market”.

Speaking at the CPIA’s launch at Chartered Accountants’ Hall, Richard Moriarty told ICAEW members that the new research and policy institute has come at the “right time” with its focus on the public interest part of audit. 

There still remained “a serious expectations gap” between what the public thinks audit does and what it actually does and the launch of CPIA, he said, offers a forum and opportunity “to help close this expectation gap about the role of the auditor”.

“That concept of serving the public interest is something that defines the very nature of the profession and sets it apart from being like any other service industry,” he said. “The expectation that professionals like ourselves serve that broader public interest and not just a narrow commercial one is the very essence of why certain professions in our country continue to be held in high public esteem.”

Better regulation

At a time when the government is focused on driving economic growth, Moriarty – a former regulator of the aviation industry – said “the audit profession is a fundamental enabler for maintaining and enhancing UK status as a leading place to build and scale a business”.

Maintaining high standards in regulation was possible without rules becoming too burdensome and stifling innovation, he told ICAEW members.

The FRC could both support economic growth and safeguard the public interest, he continued, echoing the government’s stance on reframing regulation to be an “essential enabler of economic growth and investment” as long as regulators and regulations are “proportionate and fit for the future”.

Just over seven years ago, outsourcer Carillion collapsed amid major financial mismanagement unleashing concerns over auditor independence and the role of the audit. Since then, the profession has tightened rules over independence and improved audit quality, investing heavily in new technology. The FRC has also increased fines and investigations into auditors.

But as the FRC unveiled its three-year plan last week, Moriarty said he was clear that the organisation’s role as the regulator of public interest audit “is not about trying to prevent corporate failure. It is not a failure of regulation or of the auditor when a business model is no longer viable.”

He continued: “Regulation must support responsive risk taking and not seek to eliminate it,” as the FRC is poised to reduce its guidance and encourage company directors to ‘comply or explain’, as the Corporate Governance Code requires.

The FRC would continue to challenge itself to make sure that its regulation is periodically reviewed, proportionate and fit for the future, Moriarty said.

Audit quality

Although audit quality has risen over the past few years, Moriarty said there was still too much inconsistency in audit quality performance between firms and, in some cases, within firms. The FRC and CPIA are keen to understand how they can better help firms in “this improvement journey and consistency”, especially for smaller firms in terms of their capabilities and appetite to grow and take on more public interest work.

The FRC is reviewing its audit supervision strategy to reduce regulatory burdens for firms, he said. The regulator’s future approach would be focused on a “blend based on risk-based targeted inspections and our assessment of the firm’s quality management systems”. The regulator’s use of AQR inspection scores was given too much prominence in the minds of the public when other factors should be taken into account too, he concluded.

Moriarty also took his message of the FRC’s reframing of regulation to a wider audience when he was interviewed on the Today programme on 2 April in the wake of the CPIA launch.