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Richard Moriarty, CEO of the Financial Reporting Council (FRC) has defended the regulator’s investigations into audit firm misconduct saying ‘fear of enforcement sanctions’ will not make the regulator ‘disinterested’

In a robust defence of the FRC’s disciplinary actions, Moriarty refuted concerns that robust enforcement actions were putting off new talent from joining the audit profession and that current staff were put off from certain areas of the job due to ‘fear of enforcement, sanctions’.

Speaking three months after taking up the top job at the FRC, Moriarty said: ‘I appreciate that the professional bodies, the firms and industry will be more frontline on this, absolutely. But the regulator can’t be disinterested.

‘I’m quite interested in understanding why people think the FRC’s regulatory functions act as a deterrent or a barrier to entry to the profession. Because actually, when you look at the facts, we take very, very few cases against professionals and they tend to be for serious misconduct or, you know, heinous errors of judgment that have had real consequential impacts.

‘So, you know, like most regulators, our enforcement functions are used very sparingly and in rare and significant cases.’

This is in contradiction to what Michael Izza, outgoing chief executive of ICAEW, who is due to retire soon, told the Financial Times last week.

In a surprising statement, Izza said: ‘Prior to 2017 if the FRC brought a case against an auditor, the threshold test that they were looking to meet was “misconduct”. That was lowered to non-compliance with the relevant auditing standards. That is now the lowest of any professional in the UK.

‘If there is a deficiency, and let’s say at one extreme it’s incompetence or outright deception, people should have the book thrown at them. But if the issue is one of judgment… you should be more forgiving than that.’

Moriarty went on to explain that reducing or ‘dumbing down and having a consequence free regulatory zone is not the answer to the attractiveness of the profession. We absolutely have to get the balance right.

‘Let’s be clear here that the public do not expect a consequence free zone from misconduct and serious errors that have a profound impact on the livelihoods of their pensions and communities up and down the country.’

On recruitment, Moriarty stressed that there must be a ‘pipeline of talent coming through’ for future goals to be accomplished on important issues such as public trust and confidence in audit, as well as corporate reporting and governance.

The regulator’s three-year budget has set out plans to freeze its own staff, rather than increasing headcount by 17% as planned last year.

When questioned about the reasons for the decision to stop recruitment, one of the main reasons was the government’s decision to delay legislation to create a new audit regulatory body (ARGA).

Moriarty said: ‘The 1st is the assumption that the realisation of the ARGA is now not as close as we previously forecast and I think we have to reflect that reality.

‘The 2nd is that after years of growth, I think it’s really important to pause and consolidate and make sure we are really focusing on the right priorities, embedding people into the organisation and looking to unlock efficiencies and synergies within the FRC.’

If and when the ARGA is created, the FRC will take over responsibility for local audit supervision.

On the enormous backlog of local audits, which stretches back as far as 2015, Moriarty said: ‘The backlog now measures hundreds and hundreds of audits that have just not been completed, some over several years, and it’s an issue that affects councils up and down the country. Of course, there’s complex reasons for this and no one organisation can solve this on their own.

‘It will require quite a number of organisations to act in harmony and adopt a really can-do flexible mindset to solve this.’

Moriarty makes clear that the issue at hand concerning local audit and the scale of the backlog cannot be solved solely by the FRC. He said: ‘We can coordinate and we can suggest actions for others to take as well as ourselves. But it will require a consistent and coordinated effort and also an enduring effort because I suspect the solution will be measured in years.’

Will Drysdale,

Writes in Accountancy Daily

Grant Thornton has reportedly been demoted from top tier of audit supervision after the accountancy firm cut its number of high profile clients, the Financial Times has reported.

According to regulatory filings, the Financial Reporting Council industry watchdog moved the firm from “tier one” to “tier two” supervision status last year.

The firm’s demotion to “tier two” leaves the Big Four companies, namely Deloitte, EY, KPMG and PwC, plus BDO and Mazars as the remaining “tier one” firms.

Grant Thornton cut the number of PIEs it audits by more than 70% between 2016 and 2022, auditing 20 of them in 2022.

As a result, the watchdog will only conduct inspections of the firm’s “public interest entity” audits every three years, rather than every 12 months.

In recent years, Grant Thornton has also faced several regulatory fines due to deficiencies in its audit work.

It has received a total of £4m in fines since 2021 after the FRC uncovered shortcomings in its audits of collapsed café chain Patisserie Valerie, retailer Sports Direct and outsourcer Interserve.

In 2022, the administrators of Patisserie Valerie also settled a £200m lawsuit with Grant Thornton that alleged negligence in its audits of the café chain.

However, according to the report Sarah Rapson, executive director for supervision at the FRC, said its move from tier one to two “is not a reflection of [Grant Thornton’s] audit quality but reflects their smaller share of the PIE market”.

Grant Thornton told the Financial Times: “We are extremely proud of our quality results over the last three years and respect the regulator’s decision to include our firm in its ‘Tier 2’ category of supervision.

“The decision by the FRC has no impact on our audit strategy and our continual investment in audit quality.”

Writes Cynera Rodrick in Accountancy Today

The report highlights the FRC’s intention to conduct market studies that can generate proposals to improve the way the market functions with particular regard to better choice and resilience

The Financial Reporting Council (FRC) has today (14 December) published an updated overview of competition in the UK’s audit market for public interest entities (PIE).

While the report shows a small increase in market share for challenger audit firms, the audit market remains highly concentrated. The Big Four accounting firms continue to dominate, earning 98% of FTSE 350 audit fees in 2022, resulting in limited choices for businesses and ongoing concerns about resilience. 

Over the past year, and with a focus on addressing concerns in the quality of PIE audits among smaller firms, the FRC has pursued a range of initiatives targeting different aspects of market competition. These include publishing a standard for audit committees in relation to their role on the external audit, launching the FRC’s Scalebox to assist smaller firms’ entry in the PIE audit market, and exploring barriers to growth for smaller audit firms. 

Looking ahead, the report highlights the FRC’s intention to conduct market studies (in-depth investigations) that can generate proposals to improve the way the market functions with particular regard to better choice and resilience. This will allow the FRC to explore issues relating to the audit market in more detail, generating more granular information about areas of concern and suggested actions to address them.

Mark Babington, FRC executive director of regulatory standards, said: “A resilient, competitive audit market focused on quality is essential to rebuild trust and confidence in corporate Britain. 

“While there have been some positive steps, 98 percent market share for the big four leaves little room for challengers to emerge while maintaining high standards of audit quality. The FRC will continue to collaborate across the whole system to develop the conditions for an audit market that balances quality, innovation, resilience and true choice.”

Writes  Sofia Floris in Accountancy Today

The International Auditing and Assurance Standards Board (IAASB) has released a new global auditing standard, ISA for LCE, specifically designed for smaller and less complex businesses.

The new standard, ISA for LCE, is a first of its kind, marking a significant shift in the auditing landscape, according to a statement from the standard setter. It will come into force on December 15, 2025.

Traditionally, smaller businesses have had to navigate auditing standards designed for larger, more complex entities. This new standard offers a more tailored approach, addressing the unique needs and challenges of smaller businesses.

“The static nature of audit is reinforced by standard setting processes that routinely emphasise or rely on the notion that an audit is an audit. Consistency of practice is certainly important, but it is not easy to innovate from the conceptual base that an audit is an audit (and nothing else),” says Chris Humphrey, a member of Sir Donald Brydon’s advisory board.

The release of the ISA for LCE standard represents a significant milestone in the evolution of auditing standards. It acknowledges the unique needs of smaller businesses and provides a tailored solution to meet these needs.

The new standard is applicable to both private and public sectors and is premised on the firm being subject to ISQM 12 or national requirements that are at least as demanding.  Quantitative thresholds for the use of the ISA for LCE are determined by legislative or regulatory authorities or relevant local bodies with standard-setting authority in each jurisdiction.

As Mike Suffield, director of Policy & Insights at ACCA, notes, “The standard should support a consistent and high-quality approach on the part of audit committees, with an eye on the Governments objective of broadening the audit market.”

The introduction of this new standard is expected to significantly enhance audit quality and efficiency for smaller businesses.  This targeted approach is likely to result in more accurate and meaningful audit outcomes, ultimately contributing to improved financial transparency and accountability.

Rigid standards have constrained growth

Smaller businesses have indeed faced challenges with audits in the past, often due to the rigid and sometimes complex standards that are designed with larger enterprises in mind.

Audits can be expensive, and smaller businesses may not have the financial resources to bear these costs. The fees for professional auditors can be a significant burden for a small business. In the same vein, small businesses typically have fewer staff and less specialised accounting expertise than larger companies. This can make preparing for and supporting an audit process more challenging.

For many small business owners, the familiarity with the requirements and procedures of an audit is sometimes lacking. This has led to difficulties in compliance and preparation. Keeping up with changes in audit standards and regulations can also be particularly challenging for smaller businesses that do not have dedicated compliance teams.

Even minor audit adjustments or findings can have a significant impact on SMEs financial statements and operations.

Implementation dates

After the ISA for LCE becomes effective on December 15, 2025, there will be an initial period of stability of at least three years. Meaning any possible future revisions to the ISA for LCE would not become effective before December 15, 2028.

This initial period of stability will provide stakeholders time to adopt and implement the standard before introducing any possible revisions. The IAASB will consider the best way to maintain the ISA for LCE after the initial period.

However, a core consideration will be that the ISA for LCE must remain up to date and, to the greatest extent possible, consistent with the ISAs.

Article from Accountancy Age