Financial Reporting Council Introduces Transformed Audit Supervision Framework
The Financial Reporting Council (FRC) has announced a comprehensive overhaul of its audit supervisory model, marking a significant departure from previous regulatory approaches. The accountancy watchdog is implementing a new system designed to enhance audit quality through firm-wide quality management controls rather than rigid, uniform standards.
From Policing to Partnership: A Modernized Regulatory Approach
Anthony Barret, executive director of supervision at the FRC, emphasized the necessity of this evolution, stating: "A system designed in a 2018 world is less relevant to a 2026 world." The new framework will scale supervision according to specific risk levels associated with both the audit firm and individual audits, creating a more proportionate regulatory environment.
This strategic shift comes after a period of significant audit sector challenges following high-profile corporate collapses including Carillion, Patisserie Valerie and BHS. However, FRC chief executive Richard Moriarty noted that audit quality, particularly among the Big Four firms, has "tracked consistently upwards" since those difficult periods.
Bridging the Gap Between Different Audit Markets
The FRC's new approach aims to create greater alignment between audits for public interest entity (PIE) companies - those that are larger or of significant public importance - and non-PIE audits. This initiative complements existing programs designed to build capacity in smaller firms and within the small and medium-sized enterprise (SME) market segment.
Moriarty explained the regulatory evolution: "Over the past decade, our supervisory approach has helped drive sustained improvements in audit quality, and today we have a stronger, more diverse audit market as a result. But we cannot stand still. This new approach represents the next evolution of our regulatory model - one that is more modern, proportionate and firmly grounded in risk."
Post-Legislative Context and Future Direction
The regulatory overhaul follows the disappointment of the Audit Reform and Corporate Governance (ARCA) Bill, which the Labour government scrapped in January to "avoid significant new costs to firms." The primary objective of that legislation had been to replace the FRC with ARGA, a body with significantly enhanced statutory powers to oversee the audit profession and corporate reporting.
Despite this legislative setback, Moriarty remains focused on the FRC's mission: "Although disappointed that we didn't get the Bill, albeit not surprised, it will not deflect the contribution that the organisation's got to make to supporting growth. The Bill was to improve audit quality after a very difficult time... but now audit quality has improved significantly in the last few years, but no one should be complacent."
The FRC's transition from what Moriarty described as a "policing" model to a "partnership" approach reflects the regulator's assessment that audit quality has stabilized sufficiently to warrant this strategic shift. The new system of quality management (SoQM) places firm-wide quality controls at the heart of supervisory activities, representing a fundamental reimagining of how audit oversight functions in the modern corporate landscape.
