The FRC Says It Is Not in Principle Against Greater Participation of External Private Capital in the UK Audit Market

In the United Kingdom the audit regulator, the Financial Reporting Council, set out its approach to outside money in audit firms in a letter dated September 26, 2024, headed "External private capital and UK audit firms." The letter says it was written following the FRC's annual review of audit quality and "recent media interest in private capital ownership of UK audit firms," to set out the FRC's approach. It is signed by the FRC's chief executive. Parts of the letter follow, not the whole.

The Law and the Market

"UK law requires that audit firms undertaking statutory audit work must be controlled by qualified professionals," the letter says. "It also requires auditors to be independent."

At the time of the letter, it says, only "a handful of relatively small firms" had any form of external private capital in their ownership structure. The UK audit market, in its words, "is dominated by" registered audit businesses wholly owned by their partners, delivering audit, wider assurance and related professional services.

Not Against It in Principle

"Ownership structures are a matter for the firms," the letter says. The FRC "is not in principle against a greater participation of external private capital in the UK audit market." Its role, the letter says, is to protect the public interest and support growth. It is primarily concerned with outcomes and behaviors by audit firms, such as delivering high quality audits, upholding high standards of ethical conduct, and fostering a culture toward always acting with the public interest in mind.

The FRC also recognizes, the letter says, that access to external private capital "could, in the right circumstances, have potential benefits for the UK audit market." That access, it says, "may generate additional investment that could be used to enhance audit quality within firms that might not otherwise be able to fund such capabilities."

What the FRC Asks, and What It Will Do

"However, there are important risks that will need to be carefully managed," the letter says. As with any other major change within an audit firm that could affect its leadership and culture, a change in ownership through external private capital "must be able to maintain and enhance over time the important public interest dimension of audit." It must also "be able to protect independence as required by law and allow for any threats to that independence as a result of conflicts to be effectively safeguarded."

"Like for any other significant change relating to a UK firm," the letter says, any party interested in a change of ownership by introducing external private capital "must be able to continue to provide assurance" that it will be able to support the public interest, the independence dimensions of audit and all applicable regulatory expectations. And then: "It is important to demonstrate that the legal requirements, including those pertaining to control, are met both in substance and in form."

"In substance and in form" is the demanding half of that sentence. A structure can meet the law on paper. The letter asks for more than paper, and it does not say what evidence would satisfy the regulator.

A firm that is interested in, or considering, such a change "should engage with the FRC (in addition to its Recognised Supervisory Body) at an early stage and with full candour," the letter says, and such discussions will be treated "in strictest confidence." The letter says the FRC "will make a copy of this letter available on our website so any interested party can understand our approach."

"We will continue to monitor developments closely and may update our position over time," the letter says.