Audit regulator questions competence of managerial decision making

Companies need to improve their challenge of management “urgently”, the Financial Reporting Council (FRC) has said.

The words form part of the regulator’s new Developments in Audit report, which looks at the current state of audit as observed by policymakers and stakeholders.

According to the report, published this week, audit quality is still not “consistently reaching the necessary high standards” expected from large corporate outfits.

In particular, the regulator found that audit reports show very little evidence of effectively challenging management in subjective decision making, for example, with long-term contracts, goodwill impairment, or the valuation of financial instruments.

Commenting on the finding, the FRC’s Executive Director of Supervision, David Rule, said the “inherent uncertainty” and “high potential financial impact” of these issues should be of particular focus.

“At a time when the whole audit market faces reform, we expect audit firms to make audit quality their number-one priority and to have effective programmes of work to deliver consistently high standards,” he said, adding that “inconsistent quality can lead to diminished trust in business”.

Mr Rule continued: “While we see many examples of high-quality audit, our inspectors are still identifying too many audits which require significant improvements. Inspections show that challenge of management is a particular area of concern on which audit firms need to focus.”

The report also found that year-on-year audits are not dynamic enough and do not take into account changes in the business and trading environment.

Click here to access the report.

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