Audit Quality and Regulatory Compliance: What Finance Directors Need to Know

Audit quality and regulatory compliance represent critical responsibilities for finance directors of listed companies and large private entities, with the Financial Reporting Council (FRC) and other regulatory bodies setting increasingly stringent standards. Understanding audit quality expectations, regulatory requirements, and the implications of non-compliance is essential for finance directors to protect their organisations and maintain stakeholder confidence.

FRC Audit Quality Framework

The FRC's audit quality framework sets expectations for audit firms and audited entities, emphasising the importance of robust financial reporting, effective internal controls, and transparent communication. Finance directors must understand these expectations and ensure their organisations meet the standards required for high-quality audits.

The framework encompasses various elements, including audit committee effectiveness, auditor independence, financial reporting quality, and internal control effectiveness. Finance directors should work closely with audit committees to ensure these elements are addressed comprehensively.

Public Interest Entity Requirements

Public interest entities (PIEs) face enhanced regulatory requirements, including mandatory audit firm rotation, extended auditor reporting, and additional disclosure obligations. Finance directors of PIEs must ensure compliance with these requirements and understand their implications for audit processes and stakeholder communication.

The definition of PIEs includes listed companies, banks, insurance companies, and other entities of public interest, with specific requirements varying by entity type. Finance directors should confirm their PIE status and ensure appropriate compliance measures are in place.

Audit Committee Effectiveness

Effective audit committees play a crucial role in audit quality, providing oversight of financial reporting, internal controls, and external audit processes. Finance directors should ensure audit committees have appropriate composition, expertise, and resources to discharge their responsibilities effectively.

The UK Corporate Governance Code sets expectations for audit committee composition and responsibilities, which finance directors should ensure are met. Regular communication between finance directors and audit committees facilitates effective oversight and early identification of issues.

Regulatory Enforcement and Consequences

Regulatory bodies have enhanced enforcement powers and are increasingly taking action against companies and individuals for audit quality failures and non-compliance. Finance directors must understand the potential consequences of non-compliance, including fines, reputational damage, and personal liability.