The audit profession is evolving at a rapid pace due to multiple factors such as increasing compliance risk, growing financial reporting complexity, greater scrutiny from regulators as well as resourcing challenges across the sector.
Following criticism in the 2019 Kingman Review of the effectiveness of the Financial Reporting Council (“FRC”) as an audit regulator, the Government announced it would replace the FRC with a new Audit, Reporting and Governance Authority (“ARGA”) with increased powers. As the industry awaits the launch of ARGA, the FRC has undergone a process of reform which has been felt by all stakeholders in the audit market.
Key FRS 102 changes (Effective on or after 1st January 2026)
Changes for revenue
The objective of Section 23 is for an entity to recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Five-Step Revenue Recognition Model:
- Step 1: Identify the contract(s) with a customer
- Step 2: Identify the performance obligations in the contract
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price to the performance obligations in the contract
- Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Changes for leases
The changes remove the distinction between operating leases and finance leases for lessees, requiring the recognition of a right-of-use asset and a lease liability on the balance sheet. Key changes include:
- Recognition Exemptions: There are exemptions for short-term leases and leases for which the underlying asset is of low value
- Identifying a Lease: A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration
- Lease Term: The term of a lease includes the non-cancellable period, periods covered by an extension option that the lessee is reasonably certain to exercise, and periods covered by a termination option that the lessee is reasonably certain not to exercise
- Measurement: The lease liability is measured by calculating the present value of the lease payments, and the right-of-use asset is measured at cost
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Why is the audit profession facing so much change?
Over the last five years the FRC has dramatically redefined expectations around audit quality. As a result, there has been an increasing number of high-profile cases where auditors have faced sizeable penalties along with reputational damage to firms, RIs, and audit teams. These include cases where the regulator has declared that audits haven’t met the required standards and others where breaches or deficiencies are identified during routine visits. The FRC has the power to fine and publicly reprimand the firm, the RI and the team.
The impact?
We aren’t blaming these changes entirely on the shrinking audit profession, but it certainly plays its part on those individuals who are leaving audit for a different career path. Similarly, we are seeing accountancy practices making the decision to pull out of the audit market, preferring to focus rather on the buoyant tax and accounting side of their practice.
Are future revisions to FRS 102 the greatest challenge to the audit profession yet?
From 2026, revisions to FRS 102 will come into effect which increase complexity around revenue recognition and lease accounting. These changes further align FRS 102 with IFRS.
These changes will impact accountants, auditors and businesses themselves who will all need to understand and apply the new requirements. As a Top 15 auditor to listed businesses, Gravita’s audit team is well versed in accounting for revenue and leases under IFRS.
Other audit practices, however, will need to source and train additional resources to fulfil these new compliance demands. Those firms will need to be able to demonstrate to the regulators that their teams are up to date with the changes.
Gravita working with accountancy firms to support their clients’ audit needs
With audit as a key service in our practice, Gravita has invested heavily in resources and training so that we can deliver a robust and compliance audit services, all whilst offering a best-in-class audit service. Our audit team comprises 140+ qualified individuals and we continue to grow this part of our business to meet the growing expectations of the regulator.
Whether you are a CFO looking to work with a firm able to perform a robust audit, or an accountancy practice looking to exit the audit market, but retain the accounts and tax work, we would love to talk to you about how we can help.
What next?
Please do not hesitate to get in touch with as at hello@gravita.com.
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