FRC calls for audit profitability disclosure

The Financial Reporting Council's market participants group has called on all audit firms to disclose the financial results of their statutory audits in order to improve competition and choice in the UK audit market.

Releasing its interim report the MPG , formed by the FRC to take the debate on audit choice forward, made a list of 15 recommendations to enhance choice in the market.

The MPG also called for outgoing auditors to hand over audit files to their successors and suggested that investors should be allowed to vote on the reports of audit-committees.

The suggestions by the MPG, which consists of auditors, corporates and investors, will now be opened for consultation.

'It is important now that a wide range of organisations read the report and respond to the consultation,' said FRC chief executive Paul Boyle .

The recommendations are:

1. The FRC should promote wider understanding of the possible effects on audit
choice of changes to audit firm ownership rules subject to there being sufficient
safeguards to protect auditor independence and audit quality.

2. Audit firms should disclose the financial results of their work on statutory audits
and directly related services on a comparable basis.

3. In developing and implementing policy on auditor liability arrangements,
regulators and legislators should seek to promote audit choice, subject to the
overriding need to protect audit quality.

4. Regulatory organisations should encourage appropriate participation on standard
setting bodies and committees by individuals from different sizes of audit firms.

5. The FRC should continue its efforts to promote understanding of audit quality and should promote greater transparency of the capabilities of individual audit firms.

6. The accounting profession should establish mechanisms to improve access by the incoming auditor to information relevant to the audit held by the outgoing auditor.

7. The FRC should provide independent guidance for audit committees and other
market participants on considerations relevant to the use of firms from more than
one audit network.

8. The FRC should amend the section of the Smith Guidance dealing with
communications with shareholders to include a requirement for the provision of
information relevant to the auditor selection decision.

9. When explaining auditor selection decisions, Boards should disclose any
contractual obligations to appoint certain types of audit firms.

10. Investor groups, corporate representatives and the FRC should develop good
practices for shareholder engagement on auditor appointment and reappointments
and should consider the option of having a shareholder vote on
audit committee reports.

11. Authorities with responsibility for ethical standards for auditors should consider
whether any rules could have a disproportionately adverse impact on auditor
choice when compared to the benefits to auditor objectivity and independence.

12. The FRC should review the Independence section of the Smith Guidance to
ensure that it is consistent with the relevant ethical standards for auditors.

13. Regulators should develop protocols for a more consistent response to audit firm issues based on their seriousness.

14. Every firm that audits public interest entities should comply with the provisions of the Combined Code on Corporate Governance with appropriate adaptations or
give a considered explanation if it departs from the Code provisions.

15. Major public interest entities should consider the need to include the risk of the
withdrawal of their auditor from the market in their risk evaluation and planning.

Further reading:

Read the full report

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