FRC to tighten auditing and ethical standards

The Financial Reporting Council (FRC) is to introduce more stringent ethical rules for auditors in response to findings from recent audit enforcement cases and audit inspections

The new rules are expected to include tougher regulations on audit independence and the provision of non-audit services.

In response to feedback from investors, the FRC also proposes to enhance the quality and content of auditor’s reports to improve transparency about what is found in the course of an audit.

The changes come ahead of the findings of the independent review into the quality and effectiveness of audit led by Sir Donald Brydon, and against a background of only limited improvements in the FRC’s latest round of audit quality inspections

Among the key changes the regulator is proposing is a clearer and stronger ‘objective, reasonable and informed third party test’ which requires audit firms to consider whether a proposed action would affect their independence from the perspective of public interest stakeholders rather than another auditor.

This will be supported by additional material to encourage a wide-ranging assessment which considers both the spirit and the letter of the standard.

The FRC wants to enhance the authority of the ethics partner function within audit firms, to ensure firm-wide focus on ethical matters and the public interest and to require reporting to those charged with governance where an audit firm does not follow the ethics partner’s advice.

Under the proposals the list of prohibited non-audit services that auditors of public interest entities (PIEs) can provide to audited bodies has been replaced with a much shorter list of permitted services, all of which are ‘closely related’ to an audit or required by law and/or regulation. No other services can be provided.

There is also a requirement for the auditors of all UK listed entities to include in their published auditor’s reports the performance materiality threshold used in the audit.

In addition, the proposals include further detailed amendments to individual standards to clarify the auditor’s responsibilities when considering whether the bodies they have audited are compliant with relevant laws and regulations, and when checking there are no material misstatements in the ‘other information’ companies include in their annual financial reports (other than the financial statements which are subject to audit).

The FRC said the proposals are not intended to pre-empt the outcome of the current reviews of the audit market, or the direction of future government policy.

Stephen Haddrill, FRC chief executive, said: ‘Recent corporate failures and the FRC’s own enforcement work has shown that standards need to be strengthened.

‘Our audit inspections and enforcement activity continue to identify a lack of professional scepticism and independence as being key points of failure when things go wrong.

‘The UK will only continue to attract high-quality global investment if investors have confidence in the independence of auditors and the means to have a better understanding of the critical judgements those auditors make. Our changes will strengthen and clarify ethical requirements in the public interest.’

The consultation on the changes closes on 27 September.

Consultation on Revisions to Ethical and Auditing Standards 2019 is here: https://www.frc.org.uk/consultation-list/2019/post-implementation-review-of-the-2016-auditing-an

Revised Ethical Standard 2019 Exposure Draft is here: https://www.frc.org.uk/getattachment/e59e4038-1cf4-4021-aba0-bf4d267b69de/Revised-Ethical-Standard-UK-With-Cover.pdf

Pat Sweet 

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