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The Financial Reporting Council (FRC) has announced new supervision measures which aim to support smaller audit firms seeking to grow their market share.
The company intends to launch a new initiative, an ‘Audit Firm Scalebox’ which will include bespoke measures to help smaller firms taking on public interest entity (PIE) audits and those scaling up the number or complexity of PIEs they audit.
The Scalebox is aimed at helping new PIE audit firms better understand regulatory expectations. It also intends to help firms to develop robust quality control systems as they grow and provide smaller firms, which have fewer central resources, with direct and immediate access to the regulator.
This initiative comes after an FRC inspection at Tier 2 and Tier 3 firms found significant shortcomings in audit quality at these firms.
From 2016/17 to 2021/22 the FRC reviewed 51 audits at Tier 2 and Tier 3 firms and found that 67% of them required more than limited improvements. This compares to 27% for the larger Tier 1 firms over a comparable period.
Sarah Rapson, executive director of Supervision, said: “Public interest entities must be audited by audit firms with appropriate resources and robust quality control procedures to deliver high-quality audits. 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.
“Many smaller firms inspected by the FRC are already taking effective action to address inspection findings, but it is imperative all firms take action to improve audit quality. The FRC acknowledges the need to do more to support smaller firms and we will publish more details of our new initiatives in due course.”
