Understanding the Financial Reporting Council's New Scalebox

Smaller firms are set to have access to assistance from the Financial Reporting Council (FRC) in order to help them enter the Public Interest Entity (PIE) audit space and conduct high-quality audits.

The initiative named ‘Scalebox’ is being introduced to widen choice within the PIE audit market, improve audit quality and to allow the fulfilment of the FRC’s regulator goals.

What is the Scalebox?

There are vast and often daunting regulatory expectations when it comes to auditing PIEs, which results in smaller firms not being able to compete, or not wishing to compete for these larger audits.

The Scalebox will aim to support these firms who want to compete in this space to develop and monitor quality audit processes in order to grow and succeed.

Who is it open to?

This scheme will be open to all Tier 2 and Tier 3 firms, as well as those intending to join the PIE audit market in the future which have been coined ‘Tier 4’, and therefore can be beneficial for firms of all sizes.

The FRC annually reviews those Tier 1 firms with the largest PIE market share, auditing over 1200 PIEs between them. The remainder of all PIE audits are completed by 31 firms. Tier 2 firms sit within this 31, and audit a significant number of PIEs, these firms are currently inspected every three years at least.

The remaining firms (Tier 3) within the 31 audit less than five PIEs, and are currently inspected every six years at least.

What support does the Scalebox provide?

The FRC has listed some example activities that the Scalebox might undertake, as follows:

• Review of completed audits in order to provide feedback
• Review of firm’s quality control systems, including audit methodology and approach
• Review of a firm’s governance processes if it has adopted or will adopt the Audit Firm Governance Code
• Helping to develop a firm’s knowledge on the PIE Auditor Registration process, including minimum standard requirements
• Ensuring firms understand the FRC’s enforcement procedures and expectations if an investigation or enquiry is required

A more extensive list of activities that the Scalebox might include and further information has been published by the FRC.

It has been noted that the Scalebox will not have involvement in an ongoing audit, nor give pre-approval on areas such as methodology, quality management or eligibility to become a PIE auditor so it will be important for firms to consider whether they have enough support throughout completion of an audit.