The Financial Reporting Council (FRC) has warned FTSE 350 companies to step up their corporate governance efforts after figures reveal audit quality remains below target.
The FRC’s annual report for the year ending 31 March 2019 shows 75% of audits required only limited improvements, with the remainder requiring more extensive revisions. This is short of the FRC’s 90% target.
While the figure is a slight improvement on the previous year’s 73%, the FRC said it is concerned it is not seeing more immediate improvements from the firms.
As a result, the regulator will introduce a stricter target and said it will continue to challenge and call out the firms to improve.
While it will measure audit quality against the 90% target for 2019/2020, the FRC said 100% of audits will be expected to require no more than limited improvement by 2020/2021.
The quality of audits by adviser firm Grant Thornton were a matter of “deep concern”, according to the report, with the company failing to improve the quality over the past five years.
“We have therefore required the firm to prepare and implement a detailed action plan to improve quality,” the report stated.
The number of financial penalties imposed by the FRC in the year reached 27, up from 11 the previous year, totalling £30m. The number of non-financial penalties also increased to 38, up from 11 in 2017/18.
During the year the FRC substantially revised the UK’s Corporate Governance Code and consulted on an overhaul of the UK Stewardship Code to ensure both Codes are fit for purpose, better aligned, and reflect today’s challenges.
Work undertaken in 2018/19 also laid the foundations for the FRC’s transition to a new, more powerful regulator.
Following the independent review of the FRC by Sir John Kingman, the FRC will transition into the Audit, Reporting and Governance Authority (ARGA) under a new mandate, once established by legislation.
“Our latest annual report reflects the FRC’s commitment to delivering high quality audit, corporate governance and financial reporting, which remain vital to the success of our market economy,” Sir Win Bischoff, chairman of the FRC, said.
“To achieve this, we have boosted enforcement resources, maintained a priority on tackling poor-quality audit work and raised the bar on corporate reporting,” Bischoff added.