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FRC Audit Culture Thematic Report

By Julia Penny

The FRC issued a new thematic report on audit culture on 10th May 2018, based on research at the largest 8 firms. The report identifies a number of good practice examples that could be replicated by firms and specifically highlights the importance of embedding an appropriate audit culture. This includes:

  • Giving additional prominence to audit specific behaviours such as integrity, objectivity, independence and scepticism within a firm’s culture;
  • Highlighting to staff and partners the societal value of good audit, which helps to underpin trust in business;
  • Balancing processes designed to sanction poor behaviour with better recognition of positive contributions to quality;
  • Further developing root cause analysis techniques to identify behavioural or cultural factors that contribute to good or poor quality;
  • Improving monitoring of how successful firms are at embedding their desired culture, including independent non-executive directors (INEs) being more proactive in their assessment of the steps taken to embed quality

Human nature and the audit

This is an area in which I take a keen interest. I have been teaching or lecturing on audit for almost 30 years and in that time, there have been vast improvements in audit quality overall. However, many of the problem themes remain exactly the same. So, whilst the introduction of more robust and comprehensive auditing standards (and monitoring to match this), has led to better quality audits we still see difficulties today, particularly around scepticism. This suggests that whilst most auditors will be fully aware of the requirements of auditing and ethical standards and the need to be sceptical when auditing, in practice issues arise with the correct application of these standards.

Reward the good as well as sanction the bad

I suspect many of the problems lie within the innate nature of human behaviour. For instance, the report identifies that firms have robust procedures to sanction poor quality work, but are less assiduous in ensuring that good quality is recognised.

This is similar to the child care issue that many of you might have experienced, or read about. You constantly tell a child off when they do something wrong, but do nothing when they do something right. The child does not have the good behaviour reinforced (so is less likely to repeat it), but just gets miserable about being told off, especially if they didn’t really understand what they should have been doing instead.

Now, I am not suggesting that auditors are children or immature in any way, but certain parts of human nature remain forever within us. It feels good to be told we have done something well and we are likely to remember that and attempt to repeat the behaviour. Whilst it feels bad (and may have career limiting consequences) to be picked up on doing something wrong this is, in part, often too late and doesn’t necessarily tell us what we should have done instead. So, the thematic review very sensibly suggests that firms should ensure they are recognising good audit behaviour and work as well as poor.

Global cultures to support audit principles

Another theme that the FRC identified is that there is often no global approach to setting values and culture. Additionally, as firms are multi-disciplinary, there will be specific challenges to ensuring an appropriate audit culture when other parts of the firm might legitimately feel a different culture suits them better. An identification of these challenges and how to tackle them will help firms to identify areas for improvement.

The social value of audit

Many auditors surveyed as part of this review did not identify with the societal value that audit provides. That is, they did not see that audit was a crucial part of a strong capital market with all the resultant benefits to the wider economy and individuals’ prosperity. The FRC believe that recognising the valuable contribution that audit makes to society could help to make the work important for those conducting it.


There is much more of interest within the report and I would suggest that the whole report is essential reading for anyone involved in audit quality, senior management at an audit firm or with training on audit. 

May 2018 


This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.