FRC introduce new measures to support smaller audit firms and ‘improve competition’

December 8, 2022

The audit regulator announced new supervisory measures to help smaller audit firms grab market share

The Financial Reporting Council (FRC) has revealed plans to launch a new initiative – ‘Audit Firm Scalebox’ – aimed at assisting smaller audit firms in growing their share of the market.

The new supervision measures will aid smaller firms auditing listed and other public interest entities (PIEs) by helping them to develop robust quality control systems.

“Public interest entities must be audited by audit firms with appropriate resources and robust quality control procedures to deliver high-quality audit,” Sarah Rapson, FRC executive director of supervision, said.

Market share for Tier 2 and Tier 3 firms has recently increased from 9% to 13%, with these firms auditing a minority of listed companies and other PIEs.

A high-quality audit is defined by the FRC through six principles including complying with regulatory standards and being driven by a robust risk assessment, and informed by a thorough understanding of the business and its environment.

An FRC inspection found that 67% of audits completed by Tier 2 and Tier 3firms had notable issues compared with only 27% for Tier 1 firms.

“To improve competition and choice in the market it is vital that the smaller firms have the capability and capacity to ‘scale up’ without compromising audit quality,” Rapson added.

The Audit Firm Scalebox will:

• Help new PIE audit firms better understand regulatory expectations and be able to meet high-quality standards when they take on PIE audits
• Help firms to develop robust quality control systems as they grow
• Provide smaller firms, which have fewer central resources, with direct and immediate access to the regulator
• The scalebox will work alongside the current FRC supervisory work and will be conducted by a new team, aiming to strengthen the FRC as a regulator.

Rapson acknowledged “the need to do more to support smaller firms and we [FRC] will publish more details of our new initiatives in due course”.

The extension of measures follows the new PIE Auditor Registration regime that grants the FRC more supervisory powers which came into effect on December 5, 2022.

[Accountancy Age]