FRC’s revised UK auditing standards and the future of audit negligence litigation

To reinforce auditors’ obligations in addressing fraud and assessing going concern, the FRC recently published final revisions to its UK’s core auditing standards. Of particular importance to company boards, directors and insolvency officeholders, these revisions will inevitably feature over time in disputes arising from corporate collapse and audit negligence litigation.

Key changes

Aligned with recent IAASB changes to International Standards on Auditing (ISAs), the FRC revisions address auditors’ responsibilities in two standards: ISA (UK) 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, and ISA (UK) 570 – Going Concern.

Although both revised standards apply to audits of all entities’ financial statements beginning on or after 15 December 2026, they are notably pertinent to public interest entities, including listed companies, banks and insurers.

The updated ISA (UK) 240 clarifies and strengthens auditors’ responsibilities: enhancing fraud risk‑assessment procedures, and seeking greater transparency in audit reporting by identifying fraud-related material misstatement risks and emphasising professional scepticism.

The updated ISA (UK) 570 reinforces how auditors assess and report on going concern: emphasising material uncertainty, adequate disclosure in financial statements, professional scepticism, and management plans for future actions.

Why now?

Concern remains about audit quality. This stems from auditors failing to flag material uncertainty related to going concern in their final audit reports of publicly listed companies which subsequently collapsed. Between 2015 and 2019, the controversies surrounding BHS, Carillion and London Capital and Finance are prominent UK examples, although the IAASB revisions respond to similar incidents worldwide.

Carillion’s collapse in 2018 led to lengthy investigations and a £1.3bn claim by the company’s liquidators against its former auditor, KPMG. The central allegation was that KPMG failed to detect that Carillion’s financial statements did not reflect the company’s true position, and was therefore negligent in the conduct of its audits between 2014 and 2016.

That claim settled in February 2023. The FRC subsequently levied a (discounted) £21m fine on KPMG due to the “number, range, and seriousness” of issues in its work. This has since become a touchstone in debates on audit quality and accountability.

The collapse of NMC Health in April 2020 is another recent example: it led to an FRC investigation and a c.£2bn claim by the administrators against EY, which was discontinued in January 2026 shortly before judgment after a lengthy trial. The claim alleged that EY’s audit opinions were an essential component of a fraud perpetrated on NMC Health, which involved c. $4bn (£2.9bn) in hidden debt. It further alleged that EY failed to plan or conduct audits between 2012 and 2018 with reasonable skill and care, or in accordance with applicable ISAs.

Audit litigation implications

Scope of duty

A key implication of the revisions for auditors is the expanded scope of duty and standard of care concerning the legal test for establishing negligence. When planning and conducting audits, ISAs mark the threshold they must meet. The revisions expand their duties and responsibilities in relation to fraud detection, professional scepticism, and the evaluation and reporting of going concern risks, including the ‘true and fair’ requirement that financial statements faithfully represent an organisation’s financial position.

Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, the leading case on scope of duty, reframed the “SAAMCO cap” analysis, emphasising that an auditor’s liability turns on the purpose and scope of the duty, and whether the loss suffered resulted from the very risk against which the audit was intended to guard. Underpinning the connection between the audit’s purpose and investor protection, the revisions increase the likelihood that losses arising from undisclosed fraud or unreported going concern problems will fall within the auditor’s scope of duty.

Causation

By clearly defining the steps that auditors should take in response to fraud indicators and going concern uncertainty, the recent revisions place greater emphasis on professional scepticism and the identification and communication of material uncertainty. They provide a sharper focus on causation and the counterfactual.

They also set a higher benchmark for courts to assess the “but for” scenario in the event of alleged audit failure: what would have occurred had it been conducted in accordance with applicable standards. The counterfactual will feature more in this analysis – for example, would a proper fraud investigation or going concern warning in accordance with the revisions have altered investor, creditor, regulator or director behaviour sufficiently to prevent or reduce the claimant’s loss?

There may be an additional impact on the assessment of foreseeability and remoteness. The standards expressly emphasise the risk of fraud and corporate failure: investor and creditor losses flowing from undiscovered fraud or unreported going concern weaknesses are potentially foreseeable consequences of audit failures. This opens the door for arguments that such losses fall within the auditor’s assumed responsibility.

Disclosure

The revisions also strengthen audit documentation requirements.

• ISA (UK) 240 requires auditors to document key elements of their understanding, the sources of information used, and the risk assessment procedures performed. If fraud or suspected fraud is identified, the auditor must document the results of the audit procedures performed, the significant professional judgements made, and the conclusions reached.
• ISA (UK) 570 revisions strengthen existing written-representation requirements and introduce new going concern requirements for professional judgements made by the auditor.

Disclosure will therefore remain a battleground in disputes. For example, claimants will continue to target audit working papers under Model C of Practice Direction 57AD. Change to the court’s general reluctance to order pre-action disclosure is, however, unlikely in these
cases.

Be prepared

Directors, audit committees, and auditors should prepare to operate with the revised standards for day-to-day audits. Strengthened checks around fraud and going concern are welcome, but whether the revisions will help detect severe corporate mismanagement and fraud will depend on several factors, including how auditors apply them.

The new audit standards cannot serve as guarantees against fraud or insolvency. However, they may shape judicial and public expectations about what audits are intended to achieve. In future, we can expect to see parties to litigation following a corporate collapse using these standards to argue what was reasonable at the time and what should have been escalated before a collapse became inevitable.