Some of the respondents think that the introduction of more regulation, including last month’s implementation of the EU Regulation and Audit Directive (ARD), is driving “a compliance mindset”. Longer term, this could risk the development of judgment skills, impact on the level of quality within the audit profession and deter future talent from joining it.
The survey of the audit market, which followed up on an earlier similar survey carried out two years ago for the FRC, also revealed concern about the concentration of the FTSE 350 audit market in the Big Four firms.
This worry was also highlighted in the 2014 survey where even those most closely associated with audit, including finance directors, CFOs and audit firms, said that that the dominance of the Big Four was ultimately detrimental to belief in quality.
FRC executive director for audit Melanie McLaren
The FRC’s strategy is to promote continuous improvement in audit quality
Respondents to the 2016 survey indicated that, while they generally welcomed the changes introduced by the ARD, like mandatory audit retendering and rotation and the capping of non-audit services, they feared that the increasing complexity of audit for larger businesses and public interest entities (PIEs) would ensure continuation of the Big Four’s dominance.
This stranglehold on the audit market will also be exacerbated by the purchasing power of the larger audit firms, which are already beginning to improve the effectiveness and efficiency of audit through the transformative use of technology and data analysis.
“This raises further concerns about how smaller firms will be able to compete, what the role is for the auditor, and how regulators and standard-setters will be able to keep up,” the survey suggests.
However, these concerns aside, the survey also shows that the changes to independence requirements and the promotion of quality as a driver for competition in the audit market have led to “justifiably” improved levels of confidence in audit.
Two years ago, the 2014 YouGov survey discovered that only those involved in the day-to-day audit process – including finance directors, CFOs and audit firms – were highly confident about audits.
Most stakeholders, particularly investors, wanted to see more transparency in auditor reporting and a more open and competitive auditor appointment process to help improve confidence both in auditor independence and in the audit findings.
In contrast, the 2016 survey found evidence that as a result of regulatory changes, audit firms are now seen as more independent and competing for audit engagements on quality grounds.
The most influential changes include retendering and revised ethical requirements, developments in auditor and corporate reporting, promotion of the role of the audit committee so that the auditor is no longer seen as so close to management, and independent oversight at audit firms.
The ARD also helped by introducing mandatory rotation and restrictions on the non-audit services audit firms can undertake for clients.
The FRC also points to the improvements in audit quality demonstrated by its own and the professional bodies’ monitoring results.
However, the regulator says that more work needs to be done to improve access to the market and good practice in the profession.
Over the coming year, it says, it intends to: work with the recognised professional bodies to promote audit quality; work with auditors, audit committees and investors to communicate good practice and promote continuous improvement; underpin confidence with sound and effective enforcement; and continue to promote audit quality internationally in recognition of the international nature of UK markets and investment.
It will also keep pace with changes in audit and the use of technology in improving the effectiveness and quality of audit.
“Our vision for audit is that it is trusted to provide reliable assurance on the public reporting of financial information, and in doing so, promotes good governance and facilitates the effective allocation of capital,” said FRC executive director for audit Melanie McLaren.
“The FRC’s strategy is to promote continuous improvement in audit quality. One of the key factors in achieving this is to engage with other regulatory professional bodies, auditors, audit committees and investors to communicate good practice.”