Revision of ethical standards for auditors in the UK to improve auditors independence

The UK’s audit regulator, The Financial Reporting Council (FRC), has now issued revised ethical standards that came into effect for accounting periods beginning on or after 15 March 2020. A central tenet of the revisions is that improved auditor independence and fewer conflicts of interest will drive improvements in audit quality.

The new standards come in response to public and political outcry following some high-profile corporate failures in the UK such as Thomas Cook, BHS, Carillion and Patisserie Valerie.

Some of the key changes include:

• Third party test: The definition of objective, reasonable and informed third party now focusses on the perspective of an informed investor, shareholder, or other stakeholder.
• Loan staff assignments: Loan staff assignments will generally be prohibited.
• Removal of contingent fees: Contingent fees will no longer be permitted for non-audit / additional services.
• Internal audit services: Firms will no longer be able to provide internal audit services to audited entities or their significant affiliates.
• Non audit services for public interest entities (PIEs): Rather than providing a blacklist of non-audit services which must not be provided to PIEs (their parents or worldwide controlled undertakings), the revised ethical standard now provides a whitelist of services which may be provided.
• Gifts and hospitality: The requirement to establish policies on the nature and value of gifts, favours and hospitality that may be accepted from and offered to other entities has been extended to apply to those entities which are likely to subsequently become audited entities.
• Other entities of public interest (OEPIs): A new term, which is defined as an entity which does not meet the definition of a PIE, but nevertheless is of significant public interest to stakeholders. OEPIs will be subject to the same restrictions on non-audit / additional services as PIEs for periods commencing on or after 15 December 2020, although will not be subject to the 70% non-audit services cap.
• SME listed entities: SME listed entities were not previously subject to many of the prohibitions applied to listed entities more generally – this is no longer the case.

Under the revised standards, auditors of the biggest listed companies will be banned from providing recruitment and remuneration services or playing any part in management decision making.

The standards state that it is not possible to specify all types of decision that are the responsibility of management, but they typically involve leading and directing the entity, including making significant judgments and taking decisions regarding the acquisition, deployment and control of human, financial, physical and intangible resources’.

Audit firms will have to refresh their policies, procedures and controls in light of the new standards and strengthen their governance and communication with clients about independence issues on long term engagements.

Further changes to the UK audit market are expected over the coming years as the numerous reviews that are being undertaken turn into legislation. High quality audits support the effective functioning of capital markets and give investors confidence. The revised ethical standards should support these aims by ensuring greater independence and a focus on delivering high quality audits.

For further information please contact:

Stuart Hinds, Audit and Advisory Partner, ECOVIS Wingrave Yeats, London, Great Britain

Email: stuart.hinds@ecovis.co.uk