FRC publishes the Revised Ethical Standard 2024

Having considered the responses to its consultation which closed last October, the FRC has now published its Revised Ethical Standard 2024 and accompanying Ethical Guidance – the objective, reasonable and informed third party test.

In this blog we take a look at some of the key revisions (and some areas that haven’t changed).

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 has been introduced 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.

Clarification of additional requirements

The revisions introduce a simplified set of tables to highlight the additional requirements or prohibitions that apply only to UK Statutory Public Interest Entities (UK PIEs), listed entities and both listed and Public Interest entities.

Financial dependence

In another simplification to the Standard, the FRC has redrafted paragraphs 2.3 and 2.4 which address financial relationships, along with making several 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. A few minor drafting amendments were made following the consultation for clarity and to avoid potential unintentional extensions of the requirements.

Fee dependency

Revisions have been made such that when considering the fee dependency percentage thresholds in Section 4 of the Ethical Standard, 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 have been made 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, the revisions include stricter prohibitions on IT services with respect to audit firms providing hosting services to audited entities, enhanced tax service prohibitions with respect to the majority shareholders of unlisted entities, more explicit prohibitions on recruitment and remuneration services, and extended prohibitions relating to the provision of corporate finance advice to audited entities on debt and financial instruments.

Other changes

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

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

New guidance on the objective, reasonable and informed third party test (ORITP)

Alongside the revisions to the Ethical Standard itself, the FRC has published new guidance to aid firms in applying the test in operational circumstances. The guidance highlights a number of measures which may be utilised to enhance ORITP judgements based on measures implemented by firms in practice.

Other entities of public interest (OEPIs)

Whilst not reflected in the latest revisions to the Ethical Standard, the FRC has once again set out its intention to withdraw the OEPI category once the details of the new statutory definition of a Public interest Entity (PIE) have been finalised.

Timescales

The Revised Ethical Standard 2024 becomes effective on 15 December 2024. Transitional arrangements permit engagements relating to periods commencing before this date to be conducting in accordance with extant ethical standards, with any necessary changes being implemented in the subsequent engagement period.

Engagements to provide previously permitted non-audit or additional services entered into before 15 December 2024, and for which the firm has already commenced work may continue until completed in accordance with the original engagement terms, subject to the application of appropriate safeguards.