UK to ease oversight of big audit firms

The UK’s Financial Reporting Council is set to cut the number of inspections it carries out at major audit firms in what it calls a proportionate approach, as the watchdog pivots toward supporting the government’s economic growth agenda.

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The regulator of auditors, accountants and actuaries, including consultancy giants such as KPMG, Ernst & Young, PwC and Deloitte, will place a greater emphasis on the quality of processes while reducing formal inspections where it is confident in the firm’s systems, according to a statement on Wednesday.

The new approach will take effect starting April, with a phased year of implementation for the 12 largest UK audit firms, the FRC said.

The watchdog has faced scrutiny after a series of accounting scandals rocked several businesses, including the 2018 collapse of outsourcing firm Carillion. Other examples include department store BHS, the discovery of a black hole in the accounts of cake shop Patisserie Valerie, and the failure to detect an alleged fraud at hospital company NMC Health. 

Yet the government in January decided to abandon long-awaited legislation to reform the audit sector, citing its priority to promote economic growth and reduce administrative burdens on businesses.

Under Prime Minister Keir Starmer, the Labour government has been pushing to revive a flagging economy by easing rules and last year introduced a new stronger duty for regulators to help businesses grow. The FRC said its new supervision policy would be in line with that duty, while serving the public interest.

“The evolution of our approach to audit supervision reflects a wider program in creating a regulatory environment that strengthens trust in UK markets while supporting business growth,” Richard Moriarty, chief executive officer of the FRC, said in the statement. “This new approach represents the next evolution of our regulatory model — one that is more modern, proportionate and firmly grounded in risk.” 

The regulator said it was dropping its target of inspecting FTSE 350 audits over a five-year period. It said it would instead be more targeted in its inspections in response to identified areas of risk. 

Anthony Barrett, the FRC’s director of supervision, said in an interview on Wednesday that the new regime doesn’t bring a lighter touch but a “more focused and more targeted” approach. It aims to “maintain the improved quality we have seen” and will help the FRC “target those areas in some firms that need more work,” he added.

“We recognize that we may not get everything right immediately, but we are committed to listening, learning and further evolving our approach,” Barrett said in the statement.