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The Financial Reporting Council (FRC) has launched a consultation to strengthen auditor requirements to detect and report material misstatements from non-compliance with laws and regulations and to clarify instances auditors should report such breaches, and other significant matters, to the relevant regulators.

This will enhance the useability and informativeness of the audit and provide greater assurance to users of financial statements that potential material misstatements have been properly assessed by the auditor.

The FRC is consulting on strengthening both ISA (UK) 250 Section A and ISA (UK) 250 Section B.

According to ISA (UK) 250 (Revised November 2019) Section A, non-compliance with laws and regulations can result in potential fines, litigation or other consequences which could have a material effect on the audited entity. 

Auditors will be expected to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, arising from non-compliance with laws and regulations. 

The FRC acknowledges that the auditor’s responsibilities cannot be open-ended to the effect of identifying and determining compliance with all laws and regulations relating to the entity. To assist, a more robust risk assessment process will be introduced to help auditors identify those laws and regulations that have, or may potentially have, a material effect on the financial statements.

Meanwhile, the changes to ISA (UK) 250B build on existing UK laws whereby auditors of public interest entities are expected to comply with statutory duties to report to regulators if significant matters relevant to the regulator, such as breaches in law or regulation, come to the auditor’s attention. 

The FRC is proposing to introduce a more principles-based approach so that information that is of such significance is reported to regulators even where law, regulation or relevant ethical requirements do not require it.

For both standards, the FRC is proposing an effective date for audits of financial statements for periods beginning on or after 15 December 2024. The FRC consultation will close on Friday 12 January 2024.

The FRC’s executive director of regulatory standards Mark Babington said: “A key role of auditors is to consider the risks posted where an entity they audit fails to comply with material obligations in law or regulation, that could impact that entity’s future prospects.

“Enhancing auditor requirements in this area will provide users of financial reports and accounts with improved confidence that risks which could have an impact on a company are being appropriately managed and reported.”

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The MOURA will provide a process for auditors who have obtained professional audit qualifications in either the UK or New Zealand to apply for recognition of their qualification and audit rights in the other nation.

The UK and New Zealand have signed a first of its kind agreement to recognise audit qualifications in both the UK and NZ so that auditors can more easily work between both countries.

The Memorandum of Understanding on Reciprocal Arrangements (MOURA) was signed by the UK’s Financial Reporting Council (FRC) and the NZ Financial Markets Authority (FMA) – the competent audit authorities for each country.

The UK and New Zealand signed a free trade agreement in February 2022 which included an annex on recognition of professional qualifications, encouraging regulators to establish routes to recognition and remove costly and burdensome requirements.

The FRC was awarded funding through the Department of Business and Trade’s Recognition Arrangements Grant Programme, making it possible to analyse the compatibility of UK and NZ professional qualifications. The funding is part of the government’s plans to encourage UK regulators and professional bodies in all sectors to agree recognition arrangements.

The MOURA will provide a process for auditors who have obtained professional audit qualifications in either the UK or New Zealand to apply for recognition of their qualification and audit rights in the other nation.

The agreement follows detailed analysis by both the FRC and the FMA to ensure the approved qualifications affords an assurance of professional competence equivalent to that afforded by a recognised professional qualification. Where applicable, applicants are required to complete aptitude tests or a period of adaptation.

The FRC said the MOURA will improve the quality of the UK and New Zealand audit markets by increasing the size of the talent pool over time and supports the interests of UK and New Zealand accounting firms and professional bodies. The agreement will help to deliver a more resilient audit market in the UK and New Zealand through greater competition and choice and by enabling skilled auditors to have their qualifications recognised and so move more easily between the UK and New Zealand.

The FRC is currently exploring similar arrangements with other countries that are important markets to the UK, to further widen the audit talent pool, subject to thorough assessments of the qualifications.

The FRC’s Acting CEO and Executive Director of Supervision, Sarah Rapson said: “The FRC welcomes this first of its kind agreement which will attract auditors to the UK, strengthen audit relations between the UK and NZ and supports the Government’s commitment to recognise professional qualifications internationally.

It ensures a more efficient pathway for senior auditors to work in both countries, boosting access to a wider pool of auditors, while upholding the high professional standards expected of auditors.”

Commenting on the news, Mike Suffield, director of Policy and Insights at ACCA, said: “ACCA welcomes the UK and New Zealand audit authorities agreeing mutual recognition of audit qualifications. It is good to see the work the two bodies have done to assess professional competence.

“Over time this memorandum of understanding (MoU) should increase the supply of high quality auditors for both economies. This is important at a time when audit talent globally is increasingly in short supply. This will in turn support the continued efforts from the respective regulators of the two countries to drive high quality audit in the public interest.”

He added: “This builds on the professional ties between the two countries, and helps embed the value of the strategic alliance between ACCA and Chartered Accountants ANZ which works to increase the flow of qualified accountants, including auditors, between the two countries.”

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The low number of audits of listed companies undertaken by mid-tier firms has led to concerns over the lack of competition within the audit sector.

Mid-tier audit firms feel discouraged from taking on audits of listed companies from fear that they may be hit with large fines, Thomson Reuters has reported.

This comes after the FRC issued six fines to mid-sized audit firms and auditors working from 2022/23, which was on par with 2021/22, and three times higher than the two fines issued in 2020/21 and 2019/20.

The low number of audits of listed companies undertaken by mid-tier firms has led to concerns over the lack of competition within the audit sector. The Big Four currently accounts for 98% of FTSE 350 audit fees. 

According to the FRC, it is vital that the audit industry is competitive to “preserve the integrity of financial information in capital markets”.

Concerns over investigations by the FRC into mid-tier audit firms undertaking listed company work have made it more difficult and expensive for these firms to get the professional indemnity coverage necessary for auditing listed companies. 

Lengthy investigations by the FRC and the possibility of large fines from the FRC also means that insurers of audit firms may have to increase insurance premiums.

Kyle Gibbons, Europe managing director for confirmation at Thomson Reuters, said: “The FRC is in a challenging position of needing to ensure that audit standards stay high whilst balancing that with the need to make pitching for listed company audits worthwhile for mid-tier accountancy firms

“One thing mid-market firms can proactively do to reduce the risk of manual errors is to make better use of technology. And, when adopted in a thoughtful way, technology can give these firms greater capacity to take on larger audits, and the confidence to compete for them.”

The audit profession is gearing up for a new regulator, with the Audit, Reporting and Governance Authority (ARGA) set to come into effect in 2024 with greater powers than the FRC. The new body will address issues such as audit transparency, reliability, quality and sustainability

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Sky said that the announcement from Whitehall is expected nearly two years after the consultation and that the Department for Business and Trade’s Insolvency Service will introduce measures that will allow both businesses and people to be sanctioned for misbehaviour.

Insolvency firms face being formally regulated for the first time as ministers seek to establish a new watchdog within the Insolvency Service, Sky News has reported.

The news comes after the collapse of BHS and Carillion drew attention to the conduct of company directors and auditors.

Following the collapse, a consultation was launched to create a new independent regulator in the insolvency service.

Sky said that the announcement from Whitehall is expected nearly two years after the consultation and that the Department for Business and Trade’s Insolvency Service will introduce measures that will allow both businesses and people to be sanctioned for misbehaviour.

An industry executive told Sky that the aim of the reforms is “to close a regulatory gap and bring insolvency firms in line with the rules governing providers of audit and legal services”.

So far, providers of insolvency services have been regulated by a quartet of recognised professional bodies (RPB), which include the Insolvency Practitioners Association and the Institute of Chartered Accountants in England and Wales (ICAEW).

However, the Insolvency Service issued a formal reprimand to the ICAEW for the first time in June for failing to supervise a person who was subject to professional limitations.

Sky News also stated that the scope of the new rules governing firms was unclear on Saturday (9 September), but a source added that the current quartet of RPBs would be responsible for implementing them.

The government was also planning to create a public register for all individuals and firms offering insolvency services, and establish “a system of compensation and redress amendments to the current arrangements for insolvency practitioners to hold security (bonding) to cover losses in the event of fraud or dishonesty”. It is unclear if these reforms would be included in the package.

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