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FRC chief: ‘audit is a great leveller’

8 December 2020: Sir Jon Thompson, Chief Executive of the Financial Reporting Council, answers questions on how the FRC has responded to the challenges of COVID-19, progress in audit reform, and the attractiveness of the audit profession.

The audit market faces myriad challenges that could result in significant change over the next few years. From the upcoming government consultation to the challenges of auditing and reporting during the COVID-19 pandemic, it’s fair to say there’s never been a time quite like it in the audit profession.

Following their conversation in October, Sir Jon Thompson, Chief Executive of the Financial Reporting Council (FRC), answered questions posed by Michael Izza, Chief Executive of the Institute of Chartered Accountants in England and Wales (ICAEW).

Michael Izza (MI): How has the FRC responded to the challenges of COVID-19?
Jon Thompson (JT): We have been working closely with other regulators such as the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England to ensure information continues to flow to investors and support the continued functioning of the UK’s capital markets. We have listened carefully, acted in partnership and at speed. It is our ambition as a regulator to continue our collaborative work and remain agile and flexible.

MI: Has COVID-19 changed the drivers of audit reform at all?
JT: The key drivers for audit reform are fundamentally the same and it remains front and centre for the FRC. The need to raise audit quality across all auditors still exists but we are certainly noticing some improvements, especially in terms of methodology changes. Along with the three primary external reviews shaping the agenda, there is parliamentary pressure from ministers to get on with it, they seem very engaged with this reform project. 

We are seeing significant investment in technology in terms of moving towards whole system transactions, exception reporting and better use of data and analytics. There is also improvement in the training of the people responsible for carrying out the audit. We consistently feed back on audit quality reviews on areas in which we see good practice.

MI: What is your view on increasing competition in audit?
JT: Competition is something that everyone wants to see in the interests of a healthy profession. There is plenty of opportunity for a firm that is thinking of expanding in or entering the audit market.

The Kingman review questioned whether the definition of a public interest entity has been drawn broadly enough. Bringing private businesses into a regulatory framework is something the government is highly likely to consult on and could expand the market quite significantly.

We are not in favour of shared audit but do support managed shared audit. Under the system, all but the very biggest FTSE-350 companies would be required to include at least one challenger firm in their audit tender process. We are in favour of this because the consistent message we receive from audit chairs is that the key consideration for choosing an auditor is the experience of the lead partner. Managed shared audit is an attractive way to upskill smaller firms audit practices and expose partners at these firms to larger groups. 

MI: Is the UK a global leader in audit?
JT: Lots of countries look to the UK. The vast majority of our accountancy firms are doing great work and are an excellent export for this country. The corporate governance and stewardship codes are world leading and encourage investors to get more involved in corporate life. 

The greatest thing about working for an accountancy firm is the constant investment in you, in your development, and in your knowledge because, in the end, audit is about you and your qualities and knowledge. It is a great leveller in my opinion and a profession that welcomes all: our recent diversity report reflects that. However, more needs to be done at the senior end, we want a dynamic profession in all aspects. 

MI: Do you have any thoughts on how people should be approaching this most unique of year ends?
JT: The current reporting period is very challenging, but corporates are going to approach it in a fairly similar way as to how they have done in the past. There is more uncertainty in some elements of our economy but not necessarily all, not all of the economy has shrunk or suffered. I think we learnt an awful lot from March until the summer. We listened carefully and responded quickly. That has led to tensions on occasions between companies with their auditors carefully thinking through whether they can sign off the going concern question. What that does is put more emphasis on companies to say: ‘these are our estimates, this is why we did it, this is the underpinning rationale.’ That is a big issue for 31st December audits. 

Watch Michael Izza in conversation with Sir Jon Thompson here.