FRC proposes changes to UK’s auditing and ethical standards

The FRC has proposed to set more stringent ethical rules for auditors and to enhance the quality and content of auditor’s reports in order to improve transparency about what is found in the course of an audit.

The new rules are expected to include 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. 

This will be supported by an enhanced 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.

Moreover, under the FRC's proposal, 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.

Also part of the proposal is the 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.

Further detailed amendments to individual standards 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).

“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," said Stephen Haddrill, the FRC’s chief executive. 

"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 FRC explained that its proposals are not intended to pre-empt the outcome of reviews such as the Independent Review by Sir Donald Brydon, or the direction of future government policy. Instead, they are focused on improving current auditing and ethical standards in the light of experience since the last major revision in 2016. 

The consultation period closes at 5pm on Friday, 27 September 2019.