FRC (Financial Reporting Council)

What is FRC (Financial Reporting Council)?

The FRC operates across four functional areas. It sets standards (adopting ISAs (UK) and the Ethical Standard for auditors), it supervises (registering and monitoring audit firms through recognised supervisory bodies such as the ICAEW and ICAS), it enforces (investigating misconduct and imposing sanctions), and it issues the UK Corporate Governance Code that shapes listed company reporting. The inspection programme is what most practitioners encounter directly. Under the FRC's Audit Quality Review team, every firm auditing public interest entities in the UK is subject to periodic file review. Tier 1 firms (the Big Four plus the two largest mid-tier networks) face annual inspection cycles. Tier 2 and Tier 3 firms face inspections on a rotating basis, typically every one to three years depending on the size of their PIE audit portfolio.

Each inspected file receives one of four gradings: good, limited improvements required, improvements required, or significant improvements required. The FRC publishes aggregate results by firm and identifies thematic findings across the population. For non-Big 4 firms, these published results carry particular weight because a poor grading on a small PIE portfolio is proportionally more visible. The FRC's 2024 Tier 2 and Tier 3 report flagged impairment of non-current assets, journals testing, ethics and independence, and going concern as recurring weaknesses at smaller firms.

Worked example

Client: Danish maritime logistics group, FY2025, group revenue €140M, IFRS reporter. Henriksen's UK subsidiary (Henriksen Maritime Services Ltd) is a PIE listed on the London Stock Exchange with revenue of £38M. The subsidiary's auditor is a Tier 2 UK firm. The FRC selected the engagement for inspection during the 2025/26 cycle.

Step 1 — Receive the inspection notification

The FRC notifies the audit firm that the Henriksen file has been selected. The engagement partner reviews the file for completeness. The firm's engagement quality reviewer re-reads the EQR completion memorandum.

Documentation note: confirm the EQR was completed before the audit report date per ISQM 2.25. Verify that all review points have been resolved and documented, not left as open items.

Step 2 — FRC inspection team reviews key audit areas

The inspection team focuses on revenue recognition (contract modifications with charterers), going concern (fleet financing covenants), the expected credit loss model on trade receivables, and the adequacy of related disclosures. They request the working papers, the engagement partner's rationale for key judgments, the firm's root cause analysis from a prior-year finding on covenant testing, and the EQR documentation.

Documentation note: the inspection team expects to see paragraph-level ISA references in the working papers. For the ECL model, the file should show how the engagement team evaluated the entity's staging criteria under IFRS 9 and challenged management's forward-looking adjustments, per ISA 540.13(a).

Step 3 — Receive and respond to the inspection grading

The FRC grades the Henriksen file as "improvements required," citing insufficient challenge of management's going concern cash flow forecast (the engagement team accepted a single-scenario projection without sensitivity analysis). The firm has 28 days to respond with proposed remedial actions.

Documentation note: record the FRC finding and the firm's root cause analysis per ISQM 1.42. Attach the remediation plan and map the finding to the specific quality objective in the firm's system of quality management that was not met.

Step 4 — Implement remediation and monitor

The firm updates its going concern audit programme to require documented sensitivity analysis on all PIE engagements where the entity has covenant obligations. The monitoring and remediation team schedules a follow-up review of two comparable engagements within six months.

Documentation note: record the updated methodology and the implementation date. Include planned follow-up review dates and link the remediation to the original FRC finding reference number.

Conclusion: the Henriksen engagement shows how an FRC inspection finding flows from file review to firm-level methodology change, with each step documented against the quality management framework.

Why it matters in practice

The FRC's 2024 Tier 2 and Tier 3 inspection report found that many smaller firms failed to demonstrate adequate challenge of management's going concern assessments, particularly where cash flow forecasts relied on a single scenario without sensitivity testing. ISA (UK) 570.16 requires the auditor to evaluate management's assessment, and the FRC expects that evaluation to include testing the sensitivity of the outcome to changes in key assumptions.

Firms frequently treat FRC inspection findings as isolated file-level issues rather than indicators of systemic quality management deficiencies. ISQM 1.42 requires the firm to evaluate whether identified deficiencies are isolated or systemic and to identify the root cause. The firm must then design remediation that addresses the root cause. Responding with a single file correction rather than a methodology-level change is itself a quality management failure that the FRC flags in subsequent inspections.

FRC vs. AFM

The distinction matters for firms operating across both jurisdictions. A group engagement team in London relying on a Dutch component auditor must understand that the quality oversight regimes differ in scope and enforcement mechanisms. A "good" FRC grading and an AFM "compliant" finding signal similar but not identical quality assessments.

Related terms

Frequently asked questions