Watchdogs will rely much more on audit firms’ own quality management processes and carry out fewer inspections as part of an overhaul of audit regulation, according to a new report.

The Financial Reporting Council (FRC) says greater reliance is to be placed on firms’ “systems of quality management” (SoQM), while inspection will be reduced where regulators have “confidence” that self-review is working.

The move comes as part of a major regulatory adjustment following the strengthened supervision that followed the collapse of Carillion in 2018.

Anthony Barrett, executive director of supervision at the FRC, says: “A system designed in a 2018 world is less relevant to a 2026 world.

“The revised approach is about ensuring the system works effectively as a whole. It will scale our supervisory attention to the level of risk involved, while preserving the high-quality information that investors rely on.”

Richard Moriarty, FRC chief executive, said the changes were about “creating a regulatory environment that strengthens trust” while “supporting business growth”, adding that the FRC could not “stand still”.

“This new approach represents the next evolution of our regulatory model—one that is more modern, proportionate and firmly grounded in risk.”

‘Changing priorities’

The changes comes just weeks after the government decided to end the process of audit reform that was kicked off by the Carillion scandal. Business minister Blair McDougall said at the time that the end of audit reform stemmed from changing priorities “to promote growth and reduce administrative burdens”.

While the government has pledged to continue with plans to place the FRC onto a statutory footing, other measures have been abandoned.

Those included a new definition of “public interest entity” to include large private firms; managed shared audit; and new powers to investigate and sanction company directors over failings in reporting.

Other proposals had already been jettisoned. A requirement for companies to publish an audit and assurance policy and issue a resilience statement (a move lauded by many experts) were axed by the previous government.

The FRC says consultation revealed that audit firms supported supervision “rooted” in SoQM, while there was a more mixed response to inspection frequency. The report said smaller firms had “warned against reducing inspection activity at larger firms in ways that could shift the supervisory burden onto them.”

Regulation will now involve a broad three-stage process of the FRC first undertaking risk assessment of firms, which then informs “supervisory activity”. That will consist of “baseline activity” and, the third stage, “incremental activity”, which could involve “enhanced supervision, SoQM deep dives, additional inspection activity”.

Public reporting on audit quality will also be streamlined.

The new approach will begin next month and cover the 2026-27 financial year.

In his introduction to the report, Barrett concedes that the watchdog “may not get everything right immediately”, but remains committed to listening, learning and “evolving its approach”.

“Those subject to our supervision can expect a robust, consistent, professional and transparent regulatory process based on principles of fairness, proportionality and clarity,” he adds.

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