FRC to Back Growth in a New Three-Year Plan – impacting auditors, actuaries, and D&Os

The FRC has published its Strategy for 2025-2028 and its Annual Business Plan and Budget for 2025-2026, following a period of consultation and engagement with stakeholders. There are some key messages alongside the Strategy, Plan and Budget, with the FRC emphasising an intention to support UK economic growth and investment whilst serving the public interest through "smart, targeted and proportionate" regulation. The three-year strategy and annual budget allow the FRC to set out interim objectives whilst they prepare for the Government's draft legislation to modernise its statutory powers and ensure that they are fit for purpose.

Key Takeways

The key areas of focus in the Strategy, Plan & Budget most relevant to the accounting profession are as follows:

The future of enforcement action

The paper notes the FRC's E2E review – which is looking at an "end-to-end" review of its investigation processes, examining all steps from outset to publication of outcomes.  The paper notes that this includes "… considering whether we can develop a broader and more graduated set of options for routes to resolution that can be used for investigations, depending on the circumstances".  There is a reference to audit firms taking "greater ownership and accountability of their continued improvement journey" albeit the FRC notes that enforcement will remain "an important part of our regulatory toolkit".  The FRC consulted on its review of investigations in its draft plan in December and is to consult further in the autumn.

The paper also notes that the FRC is to undertake a comprehensive review of how the Audit Supervision regulatory model should evolve to challenges and emerging issues in the UK audit market.  The FRC says it plans to implement the new model in 2026/27. 

SMEs – assisting smaller firms to conduct audits

The FRC has shared a desire to ensure that the audit market works effectively.  Part of the FRC's approach is ensuring that audit quality across the whole of the Public Interest Entity ("PIE") market is of a "consistent quality", following a push to outsource more PIE work to smaller firms outside of the Big Four.   However, the papers notes that from the most recent assessments "the quality gap between the largest firms and others had widened, not narrowed".

The FRC intends to ensure that the performance standards expected for smaller firms carrying out PIE audits are appropriate and proportionate by undertaking a market study and developing guidance to encourage auditors to apply the ISAs in a proportionate way.  The paper also notes an intention to invest more in the Scalebox initiative to help smaller firms develop their capabilities.

Risk Management - relevant risks identified by the FRC and mitigation proposals 

The FRC notes key developments on the horizon including – a focus on economic growth, AI, sustainability reporting standards, growing interest of private capital in the UK audit market and the resilience of the audit profession (including pipelines for the workforce).  The paper refers to the Sandbox which has focused on audit and assurance and that this will expand to all areas within the FRC's remit.  The FRC has set out new principal risks (as they relate to the industry) and the planned activities in the period 2025-2026 to overcome these risks:

• A lack of proactivity, responsiveness or consideration of stakeholder impacts such as evolving political expectations. The FRC notes that any delays can cause a loss of trust in corporate governance, reporting and audit quality. 

In response, the FRC says it wants to embed their growth duty in all their work and engage well with those interested in and/or affected by their work. This includes streamlining the Stewardship Code and supporting draft legislation – reducing unnecessary burdens and clarifying monitoring processes – this will be an important development for directors and officers.  Directors & Officers will be expected to embed recent updates to the UK Corporate Governance Code, in particular in relation to internal controls and Provision 29 (which comes into effect in January 2026).  This requires boards to declare the effectiveness of their internal controls and risk management systems.

• A failure to influence and implement domestic and international accounting standards – leading to costs to participants in the ecosystem and risks undermining the quality of information supporting decision-making in financial markets. 

In response, the FRC will deliver a UK standards response to the finalisation of international standards on sustainability engagements. 

• A lack of an effective supervisory model, creating a failure to drive audit quality improvements, build firms capability and market resilience – leading to a lack of audit confidence in the market.

In response, the FRC mentions a desire to implement changes to the supervision of smaller audit firms to create more proportionate inspections and to use the Scalebox initiative to work with smaller audit firms to help share best practice and develop their capability. 

The Audit Reform Bill

The three-year strategy emphasises a desire to be 'best in class' as a regulatory authority and refers to the government's commitment to Audit Reform in the July 2024 King's Speech. The report notes that the proposed legislation will place the FRC's "regulation responsibilities on a firmer footing" and notes that by the end of the 2025-28 strategy the legislative reform and transition to ARGA "should hopefully be reality".  Interestingly the FRC also says that "… we do not agree that the modernisation of the FRC's current regulatory toolkit through statutory powers would necessarily lead to a major change in the tone and approach to our regulation".

Actuaries

Outside of audit, the FRC is also responsible for the regulation of the actuarial profession alongside the Institute and Faculty of Actuaries.  The paper refers to forthcoming legislation that the FRC anticipates "will place our actuarial regulation responsibilities on a firmer footing… to define a risk-based and proportionate framework for the regulation of public interest actuarial work" and to setting "well-balanced, proportionate and targeted requirements" in relation to actuarial advice on the use of final salary scheme surpluses.

What Next?

The overall tone of the Strategy, Plan and Budget is one of growth, with the FRC's Chief Executive expressing support for "responsible risk-taking"– there is a theme from the FRC that it will look at the audit of SMEs to see if processes can be streamlined to reduce the burden on SMEs.  But what happens next for the FRC really depends on the Audit Reform and Corporate Governance Bill, and what that means in practice for the future of the FRC and its regulatory approach.