FRC calls for audit profitability disclosure

The Financial Reporting
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
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

The recommendations are:

1. The FRC should promote wider understanding of the possible effects on
choice of changes to audit firm ownership rules subject to there being
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
setting bodies and committees by individuals from different sizes of audit

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

7. The FRC should provide independent guidance for audit committees and other

market participants on considerations relevant to the use of firms from more
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
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
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

Further reading:

the full report

Boyle rebuffs calls for EU regulation

FRC reviews ‘comply or explain’ principle

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