The Future of Audit Part 4: The evolving audit regulatory landscape
Sam Snelson, 8 February 2024
Sam Snelson, 8 February 2024
In the final article of our ‘The Future of Audit’ series, it’s impossible to look at the sector without a consideration of the regulations which are at the heart of an auditor’s role. This article sheds some insight into the existing regulatory environment, current and future changes to this, and what this means for the audit industry going forward.
Audit in the UK is currently regulated by the Financial Reporting Council (FRC). The FRC’s role is to act as an independent regulator for the UK and Ireland, covering auditors, accountants and actuaries, as well as setting the UK’s Corporate Governance and Stewardship Codes applicable to premium listed companies.
Specifically in relation to audit, the FRC oversees the development and maintenance of the technical, ethical, sustainability and other standards for audit work (the Ethical Standard, ISA, ISAE, CASS and Standards for Investment Reporting).
Lubbock Fine as a firm is a member of the Institute of Chartered Accountants in England and Wales (ICAEW) which supports and regulates us, and their support and monitoring ensures that we maintain our high standards of quality in the audit work (and other services) we carry out.
The audit industry as a whole has been rocked by some high-profile failings in the audit work of larger players in the sector, and the UK audit regulatory approach is being continually reviewed on the back of this. In March 2019 it was announced that the FRC was to be transformed into ARGA, with the aims of rebuilding public trust, ensuring the UK's corporate entities are responsibly governed, empowering investors and wider stakeholders, and keeping the UK’s legal framework at the forefront of best practice.
There have, however, been numerous delays in the formation of ARGA, and as such it’s not now expected that this will come into effect before the next General Election this year. Meanwhile, last year saw a new CEO for the FRC, with a remit to lead the organisation in its role of underpinning investor and public confidence and overseeing the transition to ARGA. We’re keen to see what impact this will have on the audit industry.
Auditing standards are prepared internationally via the International Standards of Auditing (ISAs). However, the UK applies its own ISAs – set by the Audit Committee (which is part of the FRC).
These broadly follow the international standards, with some significant changes which include:
The ISAs are constantly reviewed, internationally and in the UK, and perhaps the most significant change of recent years has been the implementation of an updated ISA 315 standard which concerns ‘Identifying and Assessing the Risks of Material Misstatement’.
You may have seen the impact of this through the work carried out by auditors, as we’re now required to obtain a much more comprehensive understanding of IT systems in place, as well as more focus on the risks impacting the business and the audit. There are other changes coming in relation to the way groups are audited, amongst other things.
Alongside industry auditing standards, we continue to focus on the quality of our audit processes to exceed the quality standards which we operate under.
Not all companies in the UK are subject to audit. Broadly speaking, if you breach two out of three thresholds (revenue, gross assets and employees) for more than one year in a row you will need an audit. But there are obviously areas of complexity here, in particular if you are part of a larger group, you may need an audit even if the company itself is small.
If you’re not sure whether you require an audit or not, please do get in touch with us with one of our experts.
It’s not possible to talk about audit regulation without also considering the accounting framework that the financial statements are prepared under.
Similar to audit, accounting standards are set internationally, but the UK has its own standards (in many cases an interpretation of the International Standards) commonly referred to as UK Generally Accepted Accounting Practice or UK GAAP.
The accounting frameworks used in preparing financial statements in the UK are generally split as follows:
Over time these accounting standards change and evolve, and we keep a watchful eye on this. There are regular reviews of the UK accounting standards, and perhaps one of the more significant changes we see on the horizon will be an overhaul in the way leases are accounted for, aligning more with the international approach.
Over the past several weeks in these articles we have tried to shine some light on the current challenges and possibilities facing the audit industry and what this might mean for the future. We’re excited to embrace these as they arise and through doing so to continue to improve our audit and advisory approach and provide further insight to our clients. If you have any queries on any the matters raised here, please do get in touch, otherwise watch out for future posts from us where we will keep you updated on the impact of these changes as they arise.
While we wait for these long-promised reforms to the audit industry, we at Lubbock Fine continue to monitor the audit and accounting regulatory space to ensure that we remain fully compliant and can assist our clients in taking on board any large changes that may arise.
If you need assistance with a particular audit, or would like some advice on the accounting of a complex arrangement, please do get in touch with Partners, Lee Facey (leefacey@lubbockfine.co.uk) or Sam Snelson (samsnelson@lubbockfine.co.uk).
