Audit quality in the UK continues to improve, according to watchdogs, who warn they are changing the focus of their regulation and that firms must adapt to the expectations of staff to “retain talent”.

The Financial Reporting Council finds that a growing number of audits from the top six firms—86% compared with 74% in the previous year—require only limited improvement.

The regulator looked at 104 audits. Of the firms, PwC, KPMG, EY, Deloitte and Forvis Mazars “achieved a positive audit outcome on 90% or more of their audits”. The sixth, BDO, has been warned that it must “urgently and robustly reassess how to improves its audit quality in key areas”.

‘Significant gains’

The FRC said Forvis Mazars had “shown significant gains in audit quality.”

Sarah Rapson, executive director of supervision at the FRC, says audit quality has improved “significantly” since 2018 but progress depends on “sustained investment and cultural change”.

“The audit market is evolving rapidly, shaped by technology, new business models and shifting expectation,” says Rapson. “Our supervisory approach must evolve with it.

“But the responsibility for securing the future of the UK audit market is not ours alone. We call on audit firms, company directors, investors, professional bodies and educators to continue to work with us to build a thriving, high-quality audit profession that meets the needs of UK businesses and reinforces public confidence in our markets.”

In response to this year’s audit quality review, Dominic Stammers, head of audit at BDO, says: “We have a clear plan in place to address the FRC findings and embed improvements across our practice, and I have full confidence in our people’s expertise and commitment to consistently deliver to the highest standards.”

Talent management

The FRC says audit firms must consider staff. “A multi-generation workforce has diverse expectations—from flexible working to purpose-led careers. Firms must meet these expectations, not only to retain talent but to reflect the society they serve.”

Capital restructuring in the audit market is also a concern for the FRC, as some firms turn to private equity for investment. The watchdog restated its intention to monitor development and seek engagement with firms negotiating new shareholders.

“Any party interested in a capital restructuring must be able to continue to provide assurance that it will be able to support the public interest, the independence dimensions of audit and all regulatory expectations.”

Elsewhere, the regulator highlighted its changing approach to audit oversight.

“While inspections will continue to be an important part of our regulatory approach, we are putting more weight on how firms manage and assure their own quality management systems.

“This will place more emphasis on the role of the firm rather than the individual auditor.”

The audit sector is still waiting to hear whether it will undergo any further reform, either to the market or regulation.

Reviews have advised government to create a brand new watchdog—the Audit, Reporting and Governance Authority (ARGA) — but the necessary legislation has yet to appear, despite repeated calls for movement.

There has also been intense debate about the prospect of introducing “managed shared audits”—large audit firms working with smaller counterparts on a commission. However, a detailed proposal has yet to be made public, despite debates in the House of Lords.