Company audits: issues and proposed reforms

In January 2026, the government announced it would drop plans to introduce an Audit Reform Bill. The government cited as reasons for its decision:

• its priority to reduce administrative burden and promote economic growth
• improvements in audit regulation in recent years meaning the need for major reform was “less pressing” than it once was
• the lack of parliamentary time

This briefing reflects the policy landscape as of September 2025 and is no longer being updated.

Audit basics

The Companies Act 2006 sets out the main responsibilities of directors and auditors. Directors have an obligation to give a “true and fair view” in the annual accounts. The auditor must verify whether, in their opinion, the accounts give a “true and fair view” of the company’s situation. Large companies can only pay dividends from “properly prepared” audited accounts. According to the Financial Reporting Council (FRC), the UK audit regulator, audit serves the public interest by underpinning transparency and integrity in business.

Issues

High-profile failures such as that of BHS (2016), Carillion (2018), Patisserie Valerie and Thomas Cook (both 2019) have drawn attention to alleged poor auditing practices. The Financial Reporting Council (FRC) is the independent regulator that sets and enforces standards for corporate reporting, audit and actuarial work, and oversees the UK Corporate Governance and Stewardship Codes. Its fines for audit failures reached a record high in the financial year 2023/24 of £48.2m (before reaching any settlement with the relevant firms). The figure for 2024/25 though showed a significant decline to £ 14.5m.

Lack of competition

The audit industry is dominated by the “Big Four” accountancy firms: PWC, Deloitte, EY and KPMG. The FRC confirm that between them, the Big Four audit almost the entire FTSE 350. Although having four companies allows some competition in the market, the reality is that the Big Four would rarely all compete for the same audit contract.

Most often, a variety of conflicts of interest, including a prohibition on auditors also providing certain accounting services to clients, preclude one or more of the Big Four from tendering. For example, it is not possible for an auditor currently providing internal audit or tax advice to bid for the external audit contract of the same company. The consequence is that for companies seeking audit, there often aren’t four to choose from, but often two or even just one.

Conflicts of interest

Sometimes, management of the company and the auditor have contradicting interests, such as when there is a gap between market expectations and company performance. In such circumstances, there is a risk that management’s incentive is to overstate the performance of the company, whereas the auditor’s role is to objectively verify that the accounts are materially true and fair.

Management has the ability to make the audit more difficult by being less cooperative, the ability to not reappoint the auditor and the threat of not awarding contracts to other arms of the accountancy firm. Some have argued that the creation of audit-only firms is the solution, whereas others argue that accountancy firms should be banned from providing non-audit services to audit clients.

Quality and supervision

According to the FRC’s Annual Enforcement Review 2025, total financial sanctions in 2024/25 were £14.5m (pre-discount), with nine investigations concluded by settlement, two closed with no further action, and 12 matters resolved through constructive engagement; the FRC also reported its best timeliness to date, completing 90% of applicable investigations within two years, and launched an End-to-End Enforcement Review to introduce more graduated responses.

Recent enforcement has included major firms—for example, PwC was fined £2.9m (reduced from £4.5m) over its 2019 audit of Wyelands Bank.

According to its Annual Review of Audit Quality 2025 (PDF), FRC inspections still found a meaningful minority of audits substandard in 2024/25. At the largest firms (Tier 1), 86% of audits inspected required no more than limited improvements (up from 74% in 2023/24), But among Tier 2 and Tier 3 firms (medium and small firms) only 38% of inspected audits met the “good/limited” bar, while 31% required significant improvements—evidence that quality outside the biggest firms remains uneven.

Proposed reforms

Following a series of reviews (Kingman, Brydon, CMA and BEIS Committee), the then government confirmed in May 2022 its intention to replace the Financial Reporting Council (FRC) with a new statutory regulator, the Audit, Reporting and Governance Authority (ARGA), and to introduce wider reforms to audit and corporate governance. Key proposals included:

• Establishing ARGA with new powers over audit, corporate reporting and directors’ duties.
• Expanding the scope of regulation to large private companies.
• Introducing new reporting requirements such as a statutory Resilience Statement and Audit and Assurance Policy.

Implementation

A Draft Audit Reform and Corporate Governance Bill was announced in the July 2024 King’s Speech.

However, in July 2025 the then Parliamentary Under-Secretary of State Minister for Employment Rights, Competition and Markets confirmed to the Business and Trade Committee that pre-legislative scrutiny will not take place during this session of the Parliament and that legislation is expected in a future session.

In the meantime, the FRC remains the UK’s audit regulator and continues to implement incremental changes, including updates to the UK Corporate Governance Code 2024 and revisions to auditing standards.