Blog Full

The Financial Reporting Council plans no additional staff hires in the next 12 months as it reins in costs after double hit from ‘unexpectedly high’ public sector pay rises and next year’s national insurance hike

In a change of direction and in line with successive governments’ desires to move the regulator out of London and reduce its London-centric focus, the FRC will build up its dual-centre operation with an expansion of the new Birmingham office, adding that it would ‘skew’ its recruitment policy towards hires outside of London.

The regulator plans to move offices when the 10-year lease on its space in London Wall in the City of London expires next year, relocating to Harbour Exchange in Canary Wharf. The last time the FRC relocated in 2014 the move cost £500,000 due to capital costs and fitting out the space.

The annual budget for 2025-26 will be £74m, up 3.5% from £71.5m year on year, including running costs for the UK Endorsement Board (UKEB).

Headcount will be cut to 486, marking a 3% reduction in staff numbers, while FRC noted that it was affected by ‘an unexpectedly high public sector pay settlement’ which hiked pay increases this year.

In addition, the FRC said its budget had been ‘impacted by the change to employer’s NICs from April 2025, so to keep our overall 2025-26 budget increase as close to inflation as possible we have also sought savings in non-staff costs’.

The FRC has allocated £3m in the budget for 2025-26 to cover the higher staff costs.

The 2025-26 financial year will see a 9% increase in fees for levy payers in 2025-26, according to the FRC’s draft annual plan and budget, which has been issued for consultation with stakeholders.

Despite the above inflation levy increase, the FRC stated: ‘The FRC remains mindful of the current economic environment and is committed to avoiding unnecessary cost increases for levy payers’, adding that the rise in the levy reflects the ‘costs of core regulatory functions, in particular our corporate reporting review programme’.

For listed entities, the levies are calculated based on their market capitalisation at the end of September 2024, while latest turnover figure is used for other entities.

In terms of priorities for the next three years, the FRC said transition to a new, powerful regulator with statutory powers as the Audit, Governance and Reporting Authority (ARGA) would be pivotal. It also stressed that it would be pursuing an ‘evolved approach to supervision of audit firms and a review of enforcement procedures’.

‘To be effective we need a modernised set of statutory authorities and powers. John Kingman’s 2018 review shone a light on the serious gaps within our current authorities and remit,’ the FRC stated.

‘We welcome the government’s commitment in the July 2024 King’s Speech and we will work with DBT as they bring forward draft legislation for pre-legislative scrutiny. Our strategy has been developed to remain relevant regardless of the timing of legislation.’

The government is expected to release final plans for sweeping audit reform by the end of March 2025, but recently confirmed that ARGA will not be in place until 2028 at the earliest.

A key priority will be improving the quality of audit outside Big Four and Tier 1 firms, with an emphasis on closing the gap between the largest audit firms and the challengers ranked as Tier 2 and 3 firms, which has widened, not narrowed, in recent years. But the FRC warned that ‘the largest firms, which have in recent years enhanced their audit quality, cannot rest on their laurels’.

It will also keep close watch of the growing prevalence of private equity investment in the accountancy sector and how this affects quality and resilience of firms, and whether this is affecting the overall quality of audit. Despite this consolidation driven by private equity, the FRC warned that audit competition was limited and it will be monitoring this closely, adding: ‘Even the largest [firms] continue to face challenges competing head on with the Big Four owing to their scale, deeper pools of expertise and access to investment’.

Going forward, there will also be a focus on technology to improve productivity and effectiveness, with investment earmarked for artificial intelligence (AI) and technology, and expansion of the Sandbox initiative to develop innovative approaches to audit work.

‘We want a step change in this period in how we use and exploit technology, data and information management within our organisation,’ according to the FRC strategy plan.

The head of the FRC, Richard Moriarty said: ‘Since taking on the role of CEO a little over a year ago, I have focused on ensuring the FRC is restless at seeking to improve the way it delivers its public interest purpose and supports UK economic growth and investment. Our draft three-year strategy and draft plan and budget for 2025/26 embody this approach.

‘The strategy includes the FRC’s continued commitment to uphold high standards of corporate governance, corporate reporting, audit, and actuarial work to ensure trust and confidence in businesses across the UK.

‘This in turn enables them to attract investment and grow as well as maintain broader stakeholder support. 

‘The strategy also includes important commitments to review our regulation to ensure it is effective, proportionate and best designed for the future.’

Sara White Business and Accountancy Daily

Discover why talent retention is the top challenge for UK accountancy firms and how they’re adapting to thrive in 2025 and beyond

The biggest challenge facing UK accountancy firms isn’t macroeconomic uncertainty or regulatory compliance—it’s people.

A striking 67% of firms rank talent acquisition and retention as their top priority, according to the newly released 2024 UK Accountancy Sector Outlook Report, a collaboration between Accountancy Age and HSBC UK.

It is not secret the accountancy sector faces an intense battle for talent. As firms expand into new service lines like digital transformation and ESG advisory, the need for a dynamic workforce capable of adapting to changing client demands has never been greater. Yet, many firms are struggling to meet this challenge.

Small firms, for example, are leaning heavily on flexible working arrangements and remote options, with 77.8% and 73% respectively offering these benefits to attract top-tier candidates. Medium firms, on the other hand, prioritize career development programs, with 91.7% investing in initiatives to foster long-term employee loyalty. Large firms, equipped with greater financial resources, are deploying performance-based incentives such as bonuses and salary sacrifice schemes to maintain their competitive edge.

“The profession is at an inflection point,” notes Subarna Banerjee, UK Managing Partner at UHY. “To thrive, firms must align their values with those of their employees, fostering an environment where people feel valued and supported.”

The Costs of Attrition

Losing talent is both a reputational risk and a financial one. High employee turnover can lead to operational disruptions, decreased morale, and rising recruitment costs. According to the report, medium firms are particularly vulnerable, with 82.4% citing talent acquisition as a pressing issue. Their dual focus on scaling operations and maintaining workforce stability highlights the delicate balancing act many firms face.

Large firms, while seemingly better positioned, are not immune. Even with robust financial packages, 58.3% of large firms still identify talent retention as a challenge, compounded by increasing client pressures on pricing and expectations for innovative solutions.

Creative Solutions for a Competitive Market

To address these challenges, many firms are rethinking their approach to employee engagement and workforce development. Strategies include:

• Flexible Working Models: Small firms are leveraging flexibility as a differentiator, offering hybrid and remote options to attract younger, tech-savvy talent.
• Investment in Learning and Development: Medium firms are leading the charge in career development, recognizing that opportunities for growth are pivotal for employee satisfaction.
• Competitive Compensation Packages: Large firms are doubling down on financial incentives, aligning rewards with performance metrics to drive loyalty.

Moreover, firms across the spectrum are experimenting with initiatives like mentorship programs, wellness offerings, and diversity and inclusion efforts to create more holistic workplace environments.

Broader Challenges Facing the Sector

While talent retention is a top concern, the report highlights several other pressing issues shaping the industry:

• Technology Adoption: Over 75% of firms report year-on-year increases in technology spending, with many focusing on AI and automation to enhance efficiency and client services. However, 15% admit to struggling with adapting to technological advancements.
• ESG Objectives: Firms are increasingly prioritizing sustainability, with large firms leading the way in integrating environmental, social, and governance practices into their strategies.
• Macroeconomic Uncertainty: Rising inflation and interest rates continue to influence client pricing pressures and demand for advisory services, particularly in restructuring and insolvency.
• Regulatory Compliance: Small and medium firms cite regulatory changes as a significant challenge, with many needing to allocate more resources to meet evolving compliance standards.

These interconnected challenges underscore the complexity of the current landscape and the need for firms to adopt multifaceted strategies to remain competitive.

The report’s findings highlight that the firms that invest in their people today will be the ones that succeed tomorrow. As the sector grapples with technological advancements, evolving client needs, and economic pressures, a resilient and motivated workforce will remain the cornerstone of success

Writes Accountancy Age

The number of companies who had to withdraw financial results of companies is up from 122 in the same period last year and more than double the figure four years ago

The number of US companies that withdrew financial statements due to accounting errors has surged to a nine-year high as 140 companies had to reissue accounts in the first 10 months of the year, the FT has revealed.

According to data from Ideagen Audit Analytics, the number of companies who had to withdraw financial results of companies is up from 122 in the same period last year and more than double the figure four years ago. 

A number of “high-profile” companies were among those who admitted to doing so, including retailer Macy’s, the agricultural commodities merchant Archer Daniels Midland, and Symbiotic, a warehouse software group backed by SoftBank and Walmart. 

The Public Company Accounting Oversight Board (PCAOB) reported an increase in deficiencies in its post-pandemic inspections of audit work and has imposed stricter penalties for the most serious violations of audit standards. 

PCAOB said to the FT: “Our most recent inspections have seen significant improvement in the aggregate deficiency rates at the largest firms, which we expect to see reflected when the results are finalised next year.”

Writes Accountancy Today

The Big Four auditors earn 98% of audit fees for the largest UK companies while clients face soaring costs with prices up 27% in a single year

While 13% of FTSE 350 audits are carried out by mid-tier and challenger audit firms, these account for only 2% of total audit fees at £28m.

The total accumulative audit fees for the FTSE 350 was £1.4bn in 2023, but 98% of these fees were earned by the Big Four of PwC, Deloitte, EY and KPMG. They continue to dominate audit with an 87% market share.

Mid-tiers have only grown their share of audit business by 2% in the previous year from 11% in 2022. BDO and Forvis Mazars earned just over 4% of total listed audit fees each, while the remaining 2% was split between the remaining firms, showed analysis from the Financial Reporting Council (FRC).

PwC pipped Deloitte to the top spot in terms of audit earnings, accounting for 27% and 26% respectively of total FTSE 350 audit fees. BothEY at 19% and  KPMG at 18% lost ground in terms of market share.  

Meantime, companies are paying significantly higher costs for their audits as total fees earned by audit firms hit £1.4bn in 2023, up a staggering 27% from £1.1bn in 2022.

The FRC acknowledged growing concerns from companies about rising audit fees, stressing that some of the reasons for the recent hike in fees was down to ‘significant changes to IFRS accounting standards which created more work for auditors’ in the latest audits. It also pointed to growing costs for audit firms from wage inflation and investment in technology.

However, client companies are also responding to the hike in audit fees with a number of FTSE and AIM listed businesses swapping auditors, citing rising costs as a key factor.

There was a pickup in the number of audit tenders with 23 FTSE 350 companies changing auditor in the last year, but 94% merely swapped their Big Four auditor. Only three audits switched from one of the Big Four to a mid-tier firm. In 2022, there were fewer tenders than in previous years with only 17 audits changing hands.

The fact that just over one in 10 audits were handled by smaller firms highlights the glacial progress towards a more competitive market, despite efforts by the audit regulator to address stakeholder concerns such as differences in quality between the largest and smaller audit firms.

The FRC said its approach focuses on ‘ensuring good quality audit services are accessible to UK companies of all sizes’ and is using an audit firm ‘Scalebox’ to help smaller audit firms expand their audit share while developing and maintaining audit quality at the same time.

In terms of wider efforts to increase competition, the FRC stressed: ‘The primary aim of our competition policy is not about growing another firm so it can rival the Big Four. Growing a firm to rival the Big Four would be very difficult to do.

‘Forming an audit firm with a size, by PIE audit fee income, the same as the smallest of the Big Four – EY – is the equivalent of combining the next eight largest audit firms.

However, there is little indication that the audit market will change any time soon, with the audit regulator being very cautious about prospects for the future.

‘The existing issues are deep-seated and the market structure is heavily entrenched. It will take time – perhaps some considerable time – to realise a well-functioning audit market,’ the FRC warned.

In 2023, the challenger firms with the largest growth in audit income were BDO, RSM and Forvis Mazars, with an average increase of 22%. Grant Thornton had the lowest growth, with a 15% increase on the previous year, although the firm has to build up its listed audits after withdrawing from the market a few years ago and not re-entered the listed market until recently.

Richard Moriarty, CEO of the FRC, said: ‘Whilst the Big Four continue to dominate the market for the audits of the largest UK businesses, in the last 12 months other audit firms have successfully grown their businesses and they are now taking on more complex audits.

‘This report underscores our commitment to ensuring the whole market works as effectively as it can.’

Writes Sara White in Busienss Accountancy Daily