The Financial Reporting Council (FRC) is cautioning on the need for challenge culture in audit firms, after “consistently” finding that firms do not challenge the management of audited entities effectively in their quality reviews.
The regulator identified that 80% of firms required more than limited improvement in this area.
Following the FRC’s introduction of principles for the operational separation of audit practices to ensure that people in practices are focused on the delivery of high-quality audits in the public interest, the Big Four firms are working to implement this change fully by 2024.
David Rule, the FRC’s executive director of Supervision, said: “Robust, focused and independent challenge is vital to a high-quality audit, particularly at a time of prolonged heightened uncertainty and operational challenges.
“It should be front of mind for audit teams as they advance their planning for December 2020 year-end audits.”
He added: “Our recent review of audit of going concern showed that audit firms can get challenges right. But they need to do more to embed a challenge culture, promoting audit quality in the public interest.
“For this reason we are announcing a conference to further examine the importance of a challenge culture and will be continuing to scrutinise firms in this important area.”