FRC moves to strengthen auditor independence and ban conflicts of interest
17 December 2019
- Changes deliver stronger UK ethical requirements the FRC committed to implement
- Tougher ethical standards strengthening auditor independence, and preventing conflicts of interest
- New standard bans auditors from providing recruitment and remuneration services
To support the delivery of high-quality audit in the UK, the FRC has today issued a major revision to its Ethical Standard and revised Auditing Standards
. The changes will help to strengthen auditor independence, prevent conflicts of interest and ensure the UK is seen as a destination to do business, because of stronger investor protection resulting from high quality audit.
They incorporate changes to international ethical requirements, which now prohibit auditors from providing recruitment and remuneration services or playing any part in management decision making. Public interest entity auditors will now only be able to provide non-audit services which are closely linked to the audit itself or required by law or regulation. This will dramatically reduce the risk of a damaging conflict of interest, where the commercial interests of an auditor are perceived to be the most important factor in an audit relationship, rather than a focus on high quality audit.
The latest revisions are the result of a comprehensive post implementation review, supported by two public consultations and extensive outreach. The FRC will also monitor the outcome of the Brydon review and consider whether further changes to standards and their scope are necessary when the recommendations are implemented.
The revisions build on existing changes made to standards in 2016, which have seen audit firm fee income - from non-audit services provided to entities they audit - fall by 8 per cent. In three years, no audit firm has asked the FRC to waive the non-audit services fee cap, and audit committees for the most part, no longer consider their auditor to be the default provider for non-audit services. That is a positive change.
The FRC’s Chief Executive, Sir Jon Thompson said:
“High quality audit supports the effective functioning of capital markets and gives investors confidence.
“Where audit fails, that confidence is undermined. The steps we have taken in revising our standards include measures which our stakeholders have identified as important to strengthen their confidence in audit, by ensuring greater independence and a focus on delivering high quality and consistent work.”
The revised Ethical Standard has been simplified and made clearer to use. The revised Auditing Standards include additional application guidance to make clear how an auditor should respond to requirements. The FRC also consulted on whether further entities should be subject to the more stringent non-audit services requirements for public interest entities, which received widespread support. A decision on expanding which entities will follow these requirements has been deferred until early in the New Year after Sir Donald Brydon has issued his report, to ensure a consistent approach.
Notes to editors:
The FRC’s mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.