FRC Consults on Revisions to Ethical Standard for Auditors

Following its position paper last June, the FRC has now issued a long awaited consultation on revisions to its Ethical Standard for auditors. In this blog, we take a look at the key changes proposed.

Breaches of the Ethical Standard

Whilst firms are already obliged to report all breaches of the Ethical Standard to the Competent Authority on (at least) a biannual basis, a new requirement is proposed to mandate reporting outside this timetable where the Competent Authority would reasonably expect notice.

In other words, more serious breaches, such as those where the firm may need to consider resigning from an engagement, will need to be reported without waiting for the next biannual reporting date.

Other entities of public interest (OEPIs)

A change which will come as welcome news to many firms, is the removal of the other entity of public interest (OEPI) category from the Ethical Standard. Understanding which entities fall within its scope has proved challenging since its introduction in 2019, particularly with cross references to other legislation.

The FRC is proposing to remove the category completely in light of the government’s proposal to expand the definition of a Public Interest Entity (PIE) which will bring most current OEPIs into the PIE category. Whilst there might not be total alignment between the expansion of the definition of a PIE and the current OEPI category, the FRC believes removing the OEPI category to be proportionate and that it will help with simplification of the Ethical Standard.

Financial dependence

In another proposed simplification to the Standard, the FRC has redrafted paragraphs 2.3 and 2.4 which address financial relationships, along with making a number of consequential changes to the rest of the section.

The revised requirements include fewer cross references to other paragraphs and should make it easier to establish whether or not a financial interest is prohibited.

Fee dependency

When considering the fee dependency percentage thresholds in Section 4 of the Ethical Standard, the FRC proposes that they should also apply to a collection of entities with the same beneficial owner or controlling party (which is not a corporate holding entity).

This aims to enhance prohibitions where a firm’s independence could be threatened by an economic over reliance on fees from entities that are connected in substance if not legal form.

Non-audit services

A number of changes are proposed to prohibitions on the provision of non-audit services to align the Standard more closely with the IESBA Code and to reflect FRC inspection and enforcement findings.

Specifically, stricter prohibitions are proposed to IT services with respect to audit firms providing hosting services to audited entities, enhanced tax service prohibitions are proposed with respect to the majority shareholders of unlisted entities, more explicit prohibitions on recruitment and remuneration services are introduced, and extended prohibitions relating to the provision of corporate finance advice to audited entities on debt and financial instruments are to be introduced.

Other changes

There are a small number of other changes throughout the Ethical Standard too. Updates are proposed to reflect ISQMs rather than ISQC, and additional guidance has been incorporated in places from previously published material.

For example, it is proposed that the table of rotation periods for key audit partners previously published as part of the FRC Technical Advisory Group – Rolling Record of Actions be directly included within the Standard.

What next?

The consultation remains open until 31 October 2023, after which time feedback will be considered before the final version of the revised standard is published.

The proposed effective date of the revised Ethical Standard is 15 December 2024, and similar transitional provisions are expected to be available as when the 2019 version of the Ethical Standard came into force.