FRC minimum standard for audit committees ‘a step in the right direction’
May 23, 2023
The minimum standard for audit committees marks a step in the right direction, but it may not be the solution to build consistently high-quality audits, according to Mike Suffield, director of Policy & Insights at ACCA.
The Financial Reporting Council (FRC) announced the Minimum Standard for Audit Committees and the External Audit on 22 May.
The FRC initiated the consultation on the draft proposal for the Minimum Standard in February, in response to the Government’s consultation on Restoring Trust in Audit and Corporate Governance.
The government expressed its intention to give statutory powers to ARGA (Audit, Reporting and Governance Authority) to enforce minimum standards for audit committees in their role on external audits.
ACCA and Suffield were “pleased” to see the audit committee’s role in engagement and oversight clarified, after lobbying for this outcome.
Suffield said: “The standard should support a consistent and high-quality approach on the part of audit committees, with an eye on the Government’s objective of broadening the audit market.”
ACCA also welcomes that the standard brings together several pieces of pre-existing guidance into one place.
‘Precluding’ challenger firms
The FRC received feedback from a wide range of stakeholders in response to the standards, including investors, audit firms, accountancy bodies, and members of the public.
While Suffield stated that he welcomes the standard, he would like some clarity on what the FRC believes is a ‘good reason’ for precluding challenger auditing firms from its tendering process.
The standards will apply to FTSE350 companies, with the aim of enhancing performance and ensuring a consistent approach across audit committees within these firms.
Wave of audit investigations
2023 has already seen the FRC sanction KPMG for its audit of retailer The Works after the firm made “rudimentary failings”, leading to a fine of just over £1m. Shortly after, the FRC initiated investigations into KPMG’s audit of the consolidated financial statements of Carr’s Group plc for the period ended 28 August 2021.
PwC’s audits of Intu, Mazars’ work at Studio Retail Group, and BDO’s auditing of NMCN are already under investigation by the regulator.
“The publication of the Audit Committees and the External Audit: Minimum Standard represents a milestone in our collective efforts to restore trust in the audit profession and promote effective corporate governance,” said Mark Babington, executive director of regulatory standards at the FRC.
“We believe that the adoption of this standard will contribute to a stronger and more robust audit market.”
Audit committees may need to change approach
To comply with best practices, Suffield noted that some audit committees may need to change their approach as the FRC document hits the mark.
“This is in the public interest – audit committees play an important role in the broader corporate governance and reporting ecosystem. This guidance will help drive a consistent and high-quality approach, Suffield added, echoing Babington’s comments.
Audit committees can now voluntarily access the standard before it becomes mandatory through anticipated legislation.