The Financial Reporting Council is pivoting from its post-Carillion "enforcement era" toward a risk-based, proportionate supervisory model. As the regulator aligns with the UK’s growth agenda, we analyze whether easing inspections for top-tier firms is a pragmatic evolution or a gamble with public trust.
The UK’s audit landscape is shifting once again. In a move that signals an evolution of supervision, not the end of enforcement, the Financial Reporting Council (FRC) has unveiled a “major evolution” in its supervisory model.
In upcoming cycles, the regulator will move away from its rigid, high-frequency inspection cycle for top-tier firms, opting instead for a “proportionate” approach that rewards high-performing firms with fewer graded inspections.
For the UK’s accounting profession, this isn’t just a technical update; it’s a philosophical pivot. The FRC is essentially saying that the “stick” has done its job, and it’s time to try a more nuanced brand of oversight. But as the regulator aligns itself with the government’s wider economic growth agenda, the question remains: is the sector truly ready to grade its own homework?
Anthony Barrett, the FRC’s Director of Supervision, justifies the move by pointing to a “changed world.” Since 2018, the FRC has been on a war footing. Following the high-profile collapses of Carillion and BHS, the regulator ramped up the intensity of its Audit Quality Reviews (AQRs).
The data suggests this pressure worked, to an extent. In the FRC’s 2023 inspection cycle, 77% of audits inspected were categorized as good or requiring only limited improvement, up from lower ebbs in previous years. For the Big Four specifically, that figure reached 82%.
Under the new model, the FRC will:
Introducing a more proportionate inspection cycle, with consistently high-performing firms potentially subject to less frequent graded reviews.
Increase reliance on Internal Quality Management Systems (IQMS), effectively trusting firms to identify their own weak spots.
Deploy “Thematic Reviews” for mid-tier firms, focusing on specific systemic risks rather than broad, punitive inspections.
This shift is inseparable from the current political climate. The government scaled back and delayed long-promised reforms earlier this year, the FRC is under pressure to ensure regulation doesn’t stifle the UK’s competitiveness.
Some industry observers, including Dean Beale (executive director of the Centre for Public Interest Audit), have pointed to the cost and competitive implications of a highly risk-averse regulatory environment. By easing the burden, the FRC hopes to foster a more vibrant, competitive audit market.
However, not everyone is convinced. Lord Prem Sikka, a long-time critic of the profession, has dismissed the move as “feather-duster regulation.” His concern is rooted in history: the Carillion disaster occurred precisely because the “light touch” regulation of the early 2010s failed to catch aggressive accounting practices.
One of the most pressing reasons for a “bespoke” approach is the changing DNA of accountancy firms. We are seeing an unprecedented influx of private equity into the mid-tier Grant Thornton and Azets being recent examples of firms navigating new capital structures.
Barrett rightly points out that traditional oversight doesn’t always fit these new corporate models. Private equity involvement introduces different incentives and risk profiles. A “one-size-fits-all” inspection doesn’t account for how a PE-backed firm might prioritize growth over long-term audit quality. The FRC’s new “thematic” approach allows them to zoom in on these specific structural risks without burying the firm in paperwork.
For partners and compliance officers at UK firms, this news brings a mix of relief and responsibility.
The “Quality Dividend”: If your firm invests heavily in its internal controls and delivers consistent results, your regulatory burden will drop. This is a clear financial incentive to get it right the first time.
No More Hiding: While there may be fewer inspections, the FRC’s “targeted interventions” are intended to be more surgical. If a firm’s internal quality management system fails to catch a known issue, the fallout could be more severe because the regulator is now relying on that system.
The Mid-Tier Opportunity: By making regulation more “proportionate,” the FRC is attempting to lower the barrier to entry for smaller firms to compete for PIE (Public Interest Entity) audits.
The FRC is betting that the culture of UK audit has matured enough to handle a longer leash. By moving toward a risk-based model, they are freeing up resources to tackle the “pockets of poor quality” that still exist, particularly in the mid-market.
However, the profession must tread carefully. Public trust in audit is fragile. If this “modernized” approach leads to another major corporate failure, the backlash won’t just bring back the “stick” it will likely result in the very statutory intervention the industry has been so desperate to avoid.
For now, the message to auditors is clear: the FRC is stepping back, but they are watching more closely than ever.
