FRC to strengthen auditor reporting requirements of breaches of laws and regulations
News types: Consultation Announcement
Published: 18 October 2023
The Financial Reporting Council (FRC) has launched a consultation to strengthen auditor requirements to detect and report material misstatements from non-compliance with laws and regulations and to clarify instances auditors should report such breaches, and other significant matters, to the relevant regulators.
This will enhance the useability and informativeness of the audit and provide greater assurance to users of financial statements that potential material misstatements have been properly assessed by the auditor.
ISA (UK) 250 (Revised November 2019) Section A—Consideration of Laws and Regulations in an Audit of Financial Statements
Non-compliance with laws and regulations can result in potential fines, litigation or other consequences which could have a material effect on the audited entity. Auditors will be expected to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, arising from non-compliance with laws and regulations. The FRC acknowledges that auditor's responsibilities cannot be open-ended to the effect of identifying and determining compliance with all laws and regulations relating to the entity. To assist, a more robust risk assessment process will be introduced to help auditors identify those laws and regulations that have, or may potentially have, a material effect on the financial statements.
ISA (UK) 250 (Revised November 2019) Section B—The Auditor’s Statutory Right and Duty to Report to Regulators of Public Interest Entities and Regulators of Other Entities in the Financial Sector
The changes to ISA (UK) 250B build on existing UK laws whereby auditors of public interest entities are expected to comply with statutory duties to report to regulators if significant matters relevant to the regulator, such as breaches in law or regulation, come to the auditor’s attention. The FRC is proposing to introduce a more principles-based approach so that information that is of such significance is reported to regulators even where law, regulation or relevant ethical requirements do not require it.
The FRC’s Executive Director of Regulatory Standards, Mark Babington said:
“A key role of auditors is to consider the risks posted where an entity they audit fails to comply with material obligations in law or regulation, that could impact to that entity's future prospects.
“Enhancing auditor requirements in this area will provide users of financial reports and accounts with improved confidence that risks which could have an impact on a company are being appropriately managed and reported.”
For both standards, the FRC is proposing an effective date for audits of financial statements for periods beginning on or after 15 December 2024.
The FRC consultation closes on Friday 12 January 2024.