Sarah Rapson

Tier 2 and tier 3 firms audit a minority of listed companies and other public interest entities (PIEs) within the FRC’s regulatory scope. However their share of the market has recently grown from 9% to 13%, partly as a result of the larger tier 1 firms de-risking their audit portfolios.

The FRC’s inspection findings at tier 2 and tier 3 firms have identified significant shortcomings in audit quality.

From 2016/17 to 2021/22 the FRC reviewed 51 audits at tier 2 and tier 3 firms and found that 67% of them required more than limited improvements. This compares to 27% for the larger tier 1 firms over a comparable period.

Recognising the challenges smaller firms have in conducting high-quality PIE audits and the need for a more resilient audit market, the FRC is extending the scope of its supervision activities at these firms and intends to launch a new initiative, an ‘Audit Firm Scalebox’ which will include bespoke measures to help smaller firms taking on PIE audits and those scaling up the number or complexity of PIEs they audit.

The Scalebox will:

• Help new PIE audit firms better understand regulatory expectations and be able to meet high-quality standards when they take on PIE audits.
• Help firms to develop robust quality control systems as they grow.
• Provide smaller firms, which have fewer central resources, with direct and immediate access to the regulator.

The Scalebox will not replace existing FRC supervisory work but will be operated by a separate, dedicated team in order to enhance the FRC’s role as an improvement regulator.

The FRC has also gained additional supervisory powers through the new PIE Auditor Registration regime which came into effect on 5 December 2022. This enhances the FRC’s ability to drive improvements in audit quality, ensure firms are growing sustainably and more closely monitor the auditor’s work as well as enabling the FRC to apply conditions or undertakings when concerns are identified.

The FRC’s executive director of supervision, Sarah Rapson said: “Public interest entities must be audited by audit firms with appropriate resources and robust quality control procedures to deliver high-quality audit.

To improve competition and choice in the market it is vital that the smaller firms have the capability and capacity to ‘scale up’ without compromising audit quality.

Many smaller firms inspected by the FRC are already taking effective action to address inspection findings, but it is imperative all firms take action to improve audit quality.

The FRC acknowledges the need to do more to support smaller firms and we will publish more details of our new initiatives in due course.”