FRC issues revised Ethical Standard for Auditors
On 17 December 2019, the Financial Reporting Council (FRC) published a revised version of its Ethical Standard for Auditors. Alongside this, it published a number of revised International Standards on Auditing (UK) (ISAs (UK)). The revised Ethical Standard, the supporting Glossary and other relevant documents can be accessed here
In the press release accompanying the revised Ethical Standard, the FRC states that “the changes will help to strengthen auditor independence, prevent conflicts of interest and ensure the UK is seen as a destination to do business, because of stronger investor protection resulting from high quality audit”.
The standard has been significantly restructured, to make it easier to read than the extant 2016 version. However, the major impact will arise from the significantly more restrictive requirements which are imposed in a number of areas. The principal changes are as follows:
For audit clients which are public interest entities (PIEs – essentially fully listed entities, banks and other financial institutions), the replacement of the list of prohibited non-audit services with a much shorter list of services which may be provided to such clients. The only permitted services are either closely related to the audit itself or required by law or regulation to be provided by the auditor;
The abolition of the concept of an “SME listed entity”, for which concessions are currently available in relation to the provision of non-audit services. (For example, it is currently permissible to assist an SME listed entity with the drafting of its statutory financial statements);
Prohibition of the provision of recruitment and remuneration services to any audited entity;
Prohibition of the charging of contingent fees for any service provided to any audited entity;
Prohibition of loan staff arrangements with any audited entity; and
A requirement to report any breaches of the Ethical Standard to the auditor’s regulatory body (or to the FRC in the case of audit clients which are PIEs) every six months.
The revised Ethical Standard becomes effective on 15 March 2020.
In practical terms, this means that audits of accounting periods commencing before 15 March 2020 may be carried out in accordance with the existing standard. In addition, engagements for non-audit services which were permissible under the existing standard which have been entered into before 15 March 2020 and on which work has commenced by that date, may continue until they have been completed.
It should be noted that paragraph 5.42 of the revised Ethical Standard introduces a concept of “Other entities of public interest”. The definition of “Other entities of public interest” has not yet been determined, but it will go beyond those entities legally defined as PIEs and will draw other entities into the more stringent ethical restrictions placed upon the audits of PIEs (for example, the imposition of a strict percentage limit which total non-audit fees must not exceed in comparison to the audit fee). The FRC has stated that it will reach a conclusion as to which entities fall to be treated as “Other entities of public interest” in due course, and this will take effect from 15 December 2020.
Please contact us if you would like to discuss how the revised standard will affect you.