FRC proposes Changes to Audit Ethical Requirements
The Financial Reporting Council (FRC) has issued a consultation document on proposals to strengthen ethical requirements for auditors, and to enhance the quality and content of audit reports to improve the disclosure of audit findings. The changes are put forward in response to recent audit-related disciplinary cases, audit inspection findings and feedback from investors. In addition, a number of proposed detailed amendments to certain auditing standards are intended to clarify the responsibilities of auditors when considering the compliance of audited entities with laws and regulations, when undertaking group audit procedures and when checking that there are no misstatements in the "other information" (directors' report, strategic report etc) which companies are required to issue alongside their financial statements.
The main proposed changes include:
Simplification and restructuring of the FRC’s Ethical Standard for Auditors to make it more understandable and to achieve greater levels of compliance;
Redefinition of the "objective, reasonable and informed third party" test to focus on the perspective of public interest stakeholders rather than another auditor;
The giving of greater weight to the function of the Ethics Partner within audit firms, including requiring any instances where the firm does not follow the advice of the Ethics Partner to be reported to those charged with governance;
The replacement of the list of non-audit services which must not be provided to Public Interest Entities with a much shorter list of services which may be provided to such entities. All of the services on this new list are closely related to audit or are required by law and/or regulation; and
The introduction of a requirement for auditors of all UK listed entities to disclose in their audit reports the performance materiality level which they have used.
The FRC indicates that the proposals are not intended to pre-empt the outcomes of the various reviews of the UK audit market which are currently underway, but rather to improve current ethical and audit requirements in the light of experience since the last major revision in 2016, to drive up audit quality and to promote public confidence in audit.
The FRC's press release on its proposals, and links to the relevant documents, can be accessed here The consultation is open for comment until 5pm on Friday 27 September 2019.
If you would like to discuss the proposals and how they may impact your firm, please contact us