ICAEW changes to the UK Audit Regulations

What is the impact on audit firms and what firms must do to retain their audit registration?

The ICAEW has made changes to the UK Audit Regulations with more to follow.

The first amendments became effective from 1 October 2024 and include the following changes.

• The eligibility criteria to make it clear that where a firm’s constitution, however comprised, includes certain decisions that need more than a simple majority-vote for approval, that audit-qualified persons must be able to control any such ‘super-majorities’.
• The eligibility criteria to allow audit qualifications of certain overseas individuals to now be recognised in the UK.
• Clarify that registered auditors must ensure that they and their staff comply with their professional body’s CPD regulations.

Changes to the eligibility criteria which impact audit firms and may result in a loss of their audit registration

These changes were largely unexpected as they were not included in the 2023 consultation, relating mostly to legislative and regulatory developments during the past 12 months.

The key changes are:

• A change to the definition of ‘voting rights’ – the term will now apply to the rights to vote on all matters that direct the overall policy of the firm, or that alter its constitution.
• The introduction of a new definition of ‘majority’ – more than 50% is now required for decision making, unless a firm’s constitution specifies a higher percentage.

ICAEW acknowledges that these changes are complex and (other than sole traders) may impact on a firm’s eligibility to be audit registered. As such, although the amendments became effective from 1 October 2024, firms will have until 1 April 2025 to comply.

Impact on audit firms

As a result of the changes, audit firms must now ensure that all matters affecting the overall direction of a firm’s policy, or that alter its constitution, must be capable of being approved by qualified persons. ‘Qualified persons’ are outlined in the Companies Act as:

• individuals who hold an appropriate audit qualification
• certain third country auditors
• audit-registered firms.

Where a firm’s constitution specifies a higher percentage than the simple majority (over 50%) now required for decision making, the firm must ensure that enough voting rights are held by qualified persons to meet any approval percentages stipulated in the firm’s governance documents.

ICAEW adds: ‘It is not enough that qualified persons can veto a decision; the qualified persons must be capable of passing the vote on all matters that direct the firm’s overall policy or alter its constitution.’

It is important to note that, where the firm is a limited company, the Companies Act 2006 requires certain constitutional changes to be passed by a special resolution which requires a 75% supermajority.

The steps firms must undertake before 1 April 2025

An important first step is for a firm to check who holds the firm’s voting rights and the number and percentage that are audit qualified persons. For some firms, this may already be known but for others, this may take a while to investigate.

The rules on audit qualification have changed over the years and some member may be surprised that they do not hold an audit qualification (whilst others may be pleasantly surprised that they do!).

This important investigative step may take time, so we suggest that firms start this step as soon as possible. In order for a firm to retain its audit registration, audit qualified persons must hold a majority of the firm’s voting rights.

Next, firms must review its governance documents to identify if different percentages to a simple majority are needed for certain decisions. Where this is the case, in order for a firm to retain its audit registration, qualified persons must hold the supermajority of the firm’s voting rights if the voting matter relates to a change to the firm’s constitution or it directs the overall policy of the firm. Where this is not the case, firms may need to amend their constitution.

Finally, firms must consider if each voting matter relates to a constitutional change or directs the overall policy of the firm. ICAEW highlights that it may be necessary for firms to take external legal advice on whether a certain decision does direct its overall policy.

It is important to note that the requirements apply regardless as to whether a firm is managed by a committee, board or body.

Other changes to the eligibility criteria

Following recent agreements between the FRC and its counterparts in Australia, New Zealand and Switzerland, changes to the eligibility criteria have also been made to allow audit qualifications of certain overseas individuals to now be recognised in the UK.

Continuing Professional Development (CPD)

These changes were not unexpected given the ICAEW consultation in 2023, as well as the new CPD Regulations issued by the ICAEW earlier the same year, and the changes simply incorporate references to the new CPD requirements.

If you would like a refresher on the updated CPD regulations, our blog last year explaining the changes is a great starting point.

Future changes expected

More changes are planned for 2025 which include:

• Extending the powers of ICAEW’s Audit Registration Committee (ARC) to enable it to issue non-financial sanctions against RIs. Following feedback from the consultation, ICAEW comment that it will not be giving the ARC power to issue financial penalties against RIs at this stage (although they will keep this under review and it may be subject to another consultation in future), the ARC will, however, be able to impose a requirement for additional, relevant CPD.
• The introduction of compulsory alternates for sole practices – as concerns were raised regarding the ability of a sole practitioner auditor to find an RI who would be willing to act as an alternate, the class of individuals who could fulfil the role of alternate will be widened to include any RI or chartered accountant.

The ICAEW comment that they are staggering updates to give firms time to adapt and to ensure compliance.

The ICAEW are also inviting feedback on a proposal that will require audit registered firms to notify ICAEW when they are appointed as auditors to certain entities.

A helping hand from Mercia

As always with changes to the profession, we will keep you up to date with our insights and our blogs and podcasts so keep an eye out in the new year for any further updates from us on the new Audit Regulations.

In the meantime, if you are unsure of whether your firm will still be eligible for audit and would like help in navigating the new rules, our Technical Queries helpline is available - Technical Query Request | Mercia Group (mercia-group.com). We also have a suite of training courses, both live and on-demand, to help you ensure your CPD requirements and needs are being met.

Our training includes face-to-face, live online, on-demand and in-house workshops to make sure it can always fit around your schedule.

For more details, explore how Mercia can help with your training needs.