On 14 April, the Financial Reporting Council (FRC) published a consultation paper seeking views on its proposals and has been liaising closely with relevant audit firms. To summarise the key proposals:

• Both accountancy firms and Responsible Individuals (RIs) which undertake audits of Public Interest Entities (PIEs) will need to be admitted to a register, the ‘PIE Auditor Register’ or ‘PAR’ before being permitted to conduct a PIE audit.           
• If a firm or individual is found not to be a ‘fit and proper’ person, they will not be admitted to the PIE Auditor Register – or will be removed from the PIE Auditor Register.
• There will be an appeals process.
• The FRC can impose conditions on a person’s being on the PIE Auditor Register, or require that person to give undertakings to the FRC in order to justify their inclusion.
• Generally, matters relating to PIE audit registration will be in the public domain.
• Firms registered on the PIE Auditor Register will need to provide an annual return to the FRC.

We do not propose, here, to step into the shoes of audit firms responding to the FRC’s consultation.  Rather, we set out certain points arising from our experience of accountancy Professional Indemnity matters and FRC/ICAEW regulatory enforcement.

• Moving formal responsibility for registration of firms undertaking PIE audits under the FRC is a common sense simplification. There is currently a disconnect whereby the Audit Registration Committee (ARC) of the ICAEW (or equivalent) is the body responsible for registration of audit firms.  It is this registration which determines a firm’s ability to conduct audits, including PIE audits.  If the ARC determines that a firm’s audit standards need improvement it can impose conditions on the audit firm, with the withdrawal of registration as the ultimate sanction.  However, regulatory supervision of PIE audits is the responsibility of the FRC, through both its annual monitoring (the Audit Quality Review (AQR) programme) and its disciplinary investigations under the Audit Enforcement Procedure (AEP).  In truth, the ICAEW already has regard to the FRC’s view of a firm’s conduct of PIE audits and its effect or relevance to registration. 

• Another inconsistency remains, whereby the channel for self-reporting potential misconduct remains to the ICAEW (or equivalent). There seems no good reason why such reporting in relation to PIE audits should not also be to the FRC.  
• The FRC’s move to impose conditions or require undertakings from firms admitted to the register of PIE Auditors appears to grow out of a (welcome) trend in enforcement cases, whereby alternatives to fines and disciplinary sanctions are used in the FRC’s efforts to drive up audit quality, with the FRC looking kindly on efforts by firms and individuals to improve on their audit processes with changes reflecting ‘lessons learned’ under the AQR programme.  However, with registration on the line, the stakes are higher for firms in consequence.

• FRC regulation is largely in the public domain. Whilst the “brand” of the audit profession has suffered in the past through a public perception of there being too little regulatory transparency, we are concerned that there should be fair treatment of practising auditors and audit firms.  There is a balance to be struck between transparency, which is largely a good thing, and fairness towards firms and RIs caught in the cross-hairs of the monitoring of audit standards, where publicity and its damage to reputation may not always be warranted. 

• In an insurance context, there is the prospect that PIE auditors could be required to hold a higher level of insurance cover than other auditors.
• This requirement, together with the greater regulatory burden which comes with auditing PIEs and the higher auditing standards imposed on PIE auditors, could see an even greater bifurcation of the market between a small number of PIE audit firms, and then the rest.

• We think the FRC should beware the increasing prospect of PIE auditors becoming ‘too few to fail’ and / or certain PIEs becoming unable to find an audit firm willing to take on the audit when the accompanying regulatory risk becomes too high.

In conclusion, the stakes for firms undertaking PIE audits continue to be raised and the importance of the support of their insurers for firms undertaking PIE audits, in particular when faced with FRC investigation under the AEP, has never been higher.