The regulator is proposing a new governance code which will slash the “considerable flexibility” that audit firms have to decide how they govern their business.
Plans for the new code, which will be under consultation before being introduced in 2022, come after several large companies failed despite having their audits signed off.
The FRC said: “Public confidence and trust in audit has been damaged following high-profile corporate collapses, in which the quality of the audit and the role of the auditors have been called into question.
“Perceptions of conflicts of interest persist, despite prohibitions on the provision of non-audit services to audit clients.”
It has led the Department for Business, Energy & Industrial Strategy to propose a split between the parts of firms that audit clients and the part that provides consulting services, sometimes to the same clients.
The FRC said the last code, which started in 2016, gave companies flexibility to develop their own approaches, meaning their governance structures ended up being quite different.
It caused inconsistencies in the positions and activities of independent non-executives, a group of at least three people who are tasked with enhancing the confidence of stakeholders in some parts of the firm.
The FRC hopes that the new code will provide a clearer picture of what independent non-executives should do, and hand them more powers to demand information from the audit firms.
“Key to being an effective (independent non-executive) is timely access to information, and the ability to challenge senior leaders and influence decision-making,” the FRC said.
It will also separate the roles of board chairman and senior partner or chief executive.
FRC executive director of regulatory standards Mark Babington said: “Audit firms play a critical role in providing assurance to investors and other users of company reports to ensure their integrity and reliability.
“Well-governed audit firms that act in the public interest are more likely to deliver high-quality audit on a consistent basis.”
He added: “These proposals will provide a springboard for further progress in improving audit quality and market resilience.”