FRC Issues Thematic Review

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The United Kingdom’s Financial Reporting Council (FRC), the competent authority for audit in the UK, in an effort to improve audit quality has performed a “thematic review” to compare, and provide transparency to, actions at different firms in relation to a particular topic. The report on their review of “audit culture” was released in May. In PCAOB Chairman Duhnke’s address in May, he referenced how the FRC is using these thematic reviews in a two-pronged approach to inspecting audit firms, the other prong being individual firm inspections.

For the thematic review of audit culture the FRC looked at the eight firms that have adopted the Audit Firm Governance Code “to establish, promote and embed a culture that is committed to delivering consistently high audit quality audits.”

The report states: “It is important that firms create a culture where achieving high quality audit work is valued and rewarded, and which emphasizes the importance of ‘doing the right thing’ in the public interest. Auditors must also consider if their duty [is] to serve the needs of shareholders, rather than management of the audited entity.”

Regulation has an impact on audit culture, the report notes: “This manifests itself in a variety of ways, including auditors being fearful of the implications of delivering poor quality work. An appropriate degree of tension here is necessary to achieve consistently high quality outcomes. The FRC needs to ensure the outcomes of our regulation are fair, transparent, consistent and evidence-based. We place great emphasis on these matters and they are important elements of our own cultural design.”

However, when the FRC held focus groups to discuss the impact of regulation on audit culture, they were told that regulatory pressure is leading to increased focus on the audit process, rather than on whether or not an auditor’s judgement was sound.