Increasing regulation top concern for audit firms

Increasing regulation of the audit profession is the number one concern for audit firms, according to a new report by Thomson Reuters.

The report found that 17.4% of audit firms say regulation is their biggest concern, while the balance between advisory and audit services, and how it affects client satisfaction, was cited as the biggest concern amongst 6% of audit firms.

The news comes as the FRC issued a record £33.3m of fines to auditors in the past year.

Due to the record number of fines passed onto auditors last year, the FRC will be replaced by the Audit Reporting and Governance Authority (ARGA), next year. ARGA will have greater enforcement powers than the FRC to penalise breaches of corporate reporting, as part of its remit to ensure quality and competition.

The new report by Confirmation, ‘The Future of Audit’, outlined how better integration of technology will be crucial in improving audit quality, helping firms to ensure they are compliant with regulations. In turn, this will mean they are at a lower risk of coming under investigation by the audit regulator.

In addition to the change in regulator, the profession is still grappling with new quality management standards. As of December 2022, audit firms must adhere to the International Standard on Quality Management (ISQM 1). These new standards mean that firms must “proactively” identify and respond to risks to audit quality, which 22 professionals (3.1%) cited as a concern.

Increasing efficiency in the audit process is the most important objective for audit firms, with 19.2% of firms saying it is their biggest priority, while technology as a vehicle for improving audit quality is reflected in the second biggest focus area by 14.2% of firms. Improving risk and control was the biggest focus for 9.7% of firms.

Kyle Gibbons, managing director of Confirmation Thomson Reuters Europe, said: “In order to be a firm that’s going to be successful and win profitable business, you need to differentiate yourself as a high-quality provider with a strong reputation. You need to take additional steps beyond what’s required of you in today’s regulatory landscape so that you can stand out.

“Adoption of technology, such as robotic process automation and open banking, is on the cusp of transforming the audit process. Firms that are slow to implement these new tools are putting themselves at a considerable disadvantage.”

He added: “Technology is becoming increasingly important at the tender stage of an audit, with a growing number of board directors enquiring how firms use technology when conducting audit work. Those that quickly embrace new digital tools will likely gain the upper hand.”