The UK's Financial Reporting Council has unveiled a "major evolution" in its supervision of audit firms, introducing fewer graded inspections for well-performing companies and greater reliance on internal quality controls. Supervision director Anthony Barrett stated that the audit world has changed since the post-Carillion crackdown when the FRC needed to drive up standards. Under the new model, weaker areas will be identified partly via firms' own quality management systems.

The shift comes after the collapse of Carillion, which revealed more than £1bn in writedowns months after KPMG gave an unqualified opinion. The government recently scrapped long-promised legislation to reform the audit market, and Barrett acknowledges the approach couldn't have been implemented in 2018 when driving up quality was the priority. The move marks the latest step in a softening of the FRC's approach after years of tougher enforcement.

Critics including Lord Prem Sikka call the move "feather-duster regulation," warning of inevitable loss of public trust. However, Dean Beale of the Centre for Public Interest Audit supports the changes, arguing they address concerns about proportionality that had deterred smaller firms from complex audits due to strict oversight requirements. Beale said this risk-averse approach had added costs for UK companies.