FRC to Reduce Routine Audit Inspections, Shift to Risk-Based Oversight

The Financial Reporting Council announced a major evolution of its audit supervisory model, introducing a more proportionate, effective and integrated framework designed to enhance audit quality and reinforce resilience across the UK audit market. For KPMG and its Big Four peers, the practical upshot is fewer of the routine, graded file reviews that have shaped audit practice for the better part of a decade.

The regulator will move away from its rigid, high-frequency inspection cycle for top-tier firms, opting instead for a proportionate approach that rewards high-performing firms with fewer graded inspections. Implementation begins in April 2026 for the largest firms, with further developments to be piloted during 2026/27.

The shift marks a meaningful departure from the regulatory posture the FRC adopted after the corporate collapses that defined the late 2010s. Anthony Barrett, the FRC's Director of Supervision, pointed to a "changed world" as justification: since 2018, following the high-profile collapses of Carillion and BHS, the regulator had ramped up the intensity of its Audit Quality Reviews. That pressure, by the FRC's own account, produced results. In the 2023 inspection cycle, 77% of audits inspected were categorised as good or requiring only limited improvement; for the Big Four specifically, that figure reached 82%.

The revised approach places more emphasis on firms' Systems of Quality Management, positioning this at the heart of supervision activity, built around a consistent, risk-based assessment supported by targeted follow-up work, thematic reviews and corroborative inspections. In practical terms, that means the annual cadence of graded file reviews that audit partners at KPMG have long factored into their planning calendars will become less predictable and more conditional on a firm's demonstrated track record.

FRC Chief Executive Richard Moriarty framed the change as a necessary modernisation. "A system designed in a 2018 world is less relevant to a 2026 world," he said in the announcement. Moriarty described the evolution as part of "a wider programme in creating a regulatory environment that strengthens trust in UK markets while supporting business growth," adding that the FRC's supervisory approach over the past decade had "helped drive sustained improvements in audit quality."

Not everyone is satisfied with that reasoning. Lord Prem Sikka, a long-time critic of the profession, dismissed the move as "feather-duster regulation," pointing to the Carillion disaster as evidence of what light-touch oversight can miss.

The FRC also cited the changing structure of the audit market as a driver for the bespoke approach, noting an unprecedented influx of private equity into the mid-tier, with Grant Thornton and Azets among firms navigating new capital structures. A one-size-fits-all inspection regime, Barrett argued, does not account for how differently structured firms manage risk.

For KPMG audit professionals, the shift has direct implications beyond compliance calendars. The new model increases reliance on internal quality management systems, which places greater weight on how teams document, monitor and self-assess their own work throughout an engagement rather than in anticipation of an external reviewer. The FRC's newly launched Innovation and Improvement Hub is also exploring how artificial intelligence might shape the future of audit, a strand of the reform agenda that sits directly alongside the technology investments KPMG has been making across its own audit practice.

The question for partners and senior managers navigating the new framework is whether fewer graded reviews translate into genuine breathing room, or simply shift the scrutiny from scheduled inspections to the systems and culture that produce the work in the first place.