UK Regulator Tells Auditors They Cannot Blame AI for Mistakes

TL;DR: The Financial Reporting Council has issued what it describes as the world’s first regulatory guidance on AI in auditing. The core message is blunt: accountability stays with audit partners, not technology vendors. The guidance arrives as Big Four firms collectively pour billions into AI tools while simultaneously cutting hundreds of audit jobs.

The FRC’s new framework addresses a growing tension in the UK auditing profession. Firms are racing to adopt AI for everything from automated financial statement checks to agentic systems performing audit procedures — yet no clear rules existed for where responsibility sits when those tools get things wrong.

”You Can’t Blame It on the Box”

Mark Babington, the FRC’s executive director of regulatory standards, left little room for ambiguity. Audit partners bear full accountability for AI-assisted work, including failures caused by hallucinations, data distortions, or what the guidance terms “misuse” of AI outputs. The regulator specifically flagged the risk of “deficient” outputs leading to inappropriate audit conclusions.

The warning carries particular weight given how aggressively firms are already leveraging AI commercially. KPMG’s US operation reportedly won an audit tender from a competitor after demonstrating its AI platform, and in February the firm pressed its own auditor, Grant Thornton, for reduced fees on the basis that AI would lower audit costs.

Job Cuts and Investment Gaps

Both PwC and KPMG have announced plans to cut hundreds of audit positions, attributing the reductions to fewer mid-level staff departures rather than AI replacement. Babington pushed back against what he called “hand-wringing and panic” over job losses, insisting that professional scepticism remains essential.

Yet the regulator acknowledged a widening capability gap. The Big Four captured 90% of FTSE 350 audit fees in 2024, and their AI investment budgets dwarf those of smaller rivals. Babington said he was discussing with US regulators how private equity investment in mid-tier firms could help level the playing field — something smaller practices are actively pursuing.

Looking Forward

The FRC is also expanding its own AI use for triaging corporate reporting evidence and processing large documentation sets, though its planning budget includes only a below-inflation rise over the next two years. For UK businesses, the guidance signals that regulators expect AI adoption to accelerate across the profession — but with human judgement firmly in the loop. Firms that treat AI as a shortcut to cheaper audits, rather than a tool requiring robust oversight, can expect scrutiny.