FRC seeks to break down barriers to competition in UK audit market
February 5, 2024
The FRC is promoting initiatives to foster a more competitive market, following recent high-profile accounting scandals.
The Financial Reporting Council (FRC) has released new research highlighting significant barriers faced by audit firms seeking to compete and grow in the UK audit market. The regulator aims to foster a more vibrant and resilient audit sector through collaborative efforts with key stakeholders.
The comprehensive study identified obstacles related to recruitment, allures of more lucrative non-audit work, and broad system-wide challenges. These issues disproportionately affect small- and medium-sized audit firms trying to expand their presence.
“The audit market plays a fundamental role in upholding trust and transparency in financial reporting. By understanding what’s limiting competition, we can cultivate the conditions for greater auditor choice and overall resilience,” said Sir Jon Thompson, Chief Executive of the FRC.
“Tackling these barriers requires coordinated efforts across the ecosystem.”
Staff Recruitment and Retention Top Concern
The research found that recruitment and retention of suitably qualified and experienced staff poses the most significant barrier. Contributing factors include the substantial costs of training new joiners, inability to attract seasoned professionals, lack of interest in audit careers, and gaps in understanding statutory audit requirements.
“The limited talent pipeline squeezes smaller firms reliant on senior hires to undertake more complex audits,” explained Thompson. “We must showcase the dynamic opportunities audit provides to attract fresh interest.”
Allure of Consulting Luring Resources Away
Another core finding points to the allure of more profitable non-audit advisory work. The development prospects, more diverse client opportunities, and perceived higher financial rewards in consulting are enticing firms to shift focus away from core audit activities.
“When audit is viewed as less lucrative or limiting compared to consulting, it’s challenging for firms to prioritize growing audit capacity,” said Paul George, Executive Director of Corporate Governance and Reporting at the FRC.
“We need to spotlight the integral societal role audits play to drive greater commitment and investment.”
Regulation and Risk Exposure Also Create Headwinds
At a system-wide level, the demanding regulatory environment and fear of heightened liability risks tied to audits make it daunting for smaller firms to compete with the largest players.
“The perceived complexities of oversight and standards coupled with liability exposure concerns raise the barrier to taking on riskier, larger-scale audits,” remarked George. “But regulation ensures quality, so we must bridge understanding gaps through guidance and dialogue.”
Collaborative Solutions the Way Forward
In response to the findings, the FRC has already launched several initiatives including the Scalebox project to advise smaller firms on compliance.
New minimum standards for audit committees also aim to support competition and resilience.
Additionally, the regulator plans more market research and monitoring to stay abreast of evolving dynamics.
Professional accountancy bodies must also attract new entrants through focused messaging about audit’s societal impact while ensuring rigorous training to build capacity and skill.
For their part, audit firms need to prioritise talent recruitment and retention by highlighting the diverse opportunities the field offers. Individual mindset shifts to recognise the strong growth runway, especially in the non-PIE market, remain imperative.
The FRC is urging the government to encourage competition and policies that allow auditors to thrive, thereby benefiting the UK’s standing as a premier financial hub. Ongoing collaboration by all parties can break down persistent barriers and enable choice, quality and resilience across the audit ecosystem.