Operational separation of audit practices
23 February 2021
The Financial Reporting Council (FRC) published principles for operational separation of the audit practices
of the ‘Big 4’ firms in July 2020. The FRC asked the firms to submit their implementation plans by 23 October 2020. The FRC has reviewed these plans and discussed them with the firms individually and is now content for the firms to move to the next stage of implementation. The firms’ progress will continue to be closely monitored against the milestones in their plans and the FRC will provide feedback and challenge to the firms on their arrangements.
The FRC has made some changes to the principles following our analysis of the firms’ implementation plans:
- To clarify that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients.
- To increase the minimum proportion of revenue within the ring-fence that must be derived from audit.
- To confirm that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivized for sales passed to other parts of the firm.
The updated principles are available here
The objectives of operational separation, which is world leading, are to ensure that audit practices are focused above all on delivery of high-quality audits in the public interest, and do not rely on persistent cross subsidy from the rest of the firm. The FRC's desired outcomes include:
- Audit practice governance prioritises audit quality and protects auditors from influences from the rest of the firm that could divert their focus away from audit quality;
- The total amount of profits distributed to the partners in the audit practice does not persistently exceed the contribution to profits of the audit practice;
- The culture of the audit practice prioritises high-quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement; and
- Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society.