FRC calls for five-year audit partner switch

The Financial Reporting Council (FRC) wants to see the International Ethics Standards Board for Accountants (IESBA) strengthen requirements in its code of ethics for changes of personnel on audit engagements to address the lack of trust in auditor independence and scrutiny, and enhance confidence in the overall effectiveness and quality of audit

The regulator’s recommendations are contained in its response to the IESBA consultation on its Exposure Draft – Long association of personnel with an audit or assurance client.

The IESBA proposals include revisions to the Code of Ethics for Professional Accountants to allow key audit partners to remain on an audit for up to seven years, with a potential extension in some instances to eight years.

In its response, the FRC states: ‘We believe that it is helpful that the period for which key audit partners can act as such is consistent, whether they are the engagement partner, engagement quality control reviewer or other partner making key decisions or judgments.

'However, we believe that IESBA has reached the wrong conclusion that it is not appropriate to reduce the current period from seven years to five.’

The FRC argues that a five-year rotation period would ensure that a fresh mind is brought to the audit more frequently and reduce any familiarity threat, and says while its own rules allow for increasing the time-on period from five to seven years in certain circumstances on the grounds of preserving audit quality, ‘this is intended to apply in exceptional circumstances and does not provide an argument that seven years is therefore acceptable as a general base period’.

The FRC supports the IESBA proposal to increase the ‘time-off’ period for engagement partners to five years, but says that it is not appropriate to have a shorter period of time-off for other key audit partners. It suggests that a five year rule should become the standard for this as well as this ‘would be a less complex arrangement and would be easier for stakeholders not directly involved in audit to understand’.

The regulator states: ‘We believe that the whole position could be made easier to understand, especially for third parties, if consistent periods of time-on and time-off were applied to all key audit partners regardless of the specific role served.’

The FRC also wants to see stronger safeguards against threats posed by familiarity, and says that to address fully concerns of threats to objectivity, there should be no involvement at all with the audit during the time-off period, other than responding to queries concerning previously completed audits the partner was involved with. In cases where specific industry or technical expertise is needed on an audit, additional safeguards should be introduced to ensure objectivity and independence are not compromised.

In rare circumstances, it would support the need to extend, by a limited amount, the total time-on period served, but stresses this should require the approval of those charged with governance, usually the audit committee.

The ED Proposed Changes to Certain Provisions of the Code Addressing the Long Association of Personnel with an Audit or Assurance Client is here: http://www.ifac.org/publications-resources/proposed-changes-certain-provisions-code-addressing-long-association-personne

The FRC response is here: https://www.frc.org.uk/Our-Work/Publications/FRC-Board/FRC-response-to-IESBA-Exposure-Draft-–-Propose-(1).pdf

 

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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