News June 2016 Statement from Stephen Haddrill, Chief Executive of the Financial Reporting Council, regarding the i

Statement from Stephen Haddrill, Chief Executive of the Financial Reporting Council, regarding the implementation of the EU Audit Regulation and Directive

17 June 2016

“Following Parliamentary approval of legislation to implement the 2014 EU Audit Regulation and Directive (ARD), its requirements have now come into force.

The Government has designated the FRC the UK Competent Authority for audit with responsibility for the regulation of statutory audit; including setting auditing and ethical standards, monitoring and enforcement. We will seek to promote high quality audit that underpins investor confidence.

The FRC will work closely with the audit recognised supervisory bodies in promoting the quality of audit and, where possible, will delegate regulatory functions to them.

New UK auditing and ethical standards published today provide auditors with a comprehensive basis to comply with their updated obligations. The changes to the ethical standard set out the principles that underpin high quality, independent audit and, particularly for the audits of Public Interest Entities (PIEs)[1] strengthen auditor independence by prohibiting or restricting a range of engagements that could result in a conflict of interest. Reflecting the FRC’s commitment to proportionate regulation, the revised standards contain some flexibility to allow an auditor to provide some additional assistance to smaller and medium-sized entities.

We have also issued updates to the UK Corporate Governance Code and Guidance on Audit Committees to reflect changes arising from the legislation on audit committees and auditor appointments. We will avoid further updates to the Code until at least 2019.

We have developed a new audit enforcement procedure which is published today, following earlier consultation. This provides a new administrative procedure where there has been breach of regulatory requirements which is aimed at promoting the early conclusion of enforcement cases.”

[1] PIE includes entities incorporated in an EU member state with securities listed on a regulated market, credit institutions and insurers.

Key Facts

  1. The Statutory Auditors and Third Country Auditors Regulations 2016 (‘SATCAR 2016’) come into effect on Friday 17 June. SATCAR 2016 makes the FRC the UK’s Competent Authority for audit, recognises the role of the professional bodies and places obligations on PIEs in connection with auditor appointments, including retendering and rotation requirements.

  2. The FRC, Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have effected changes alongside SATCAR to implement PIE- related requirements. In particular, the FRC has now finalised previously published draft material which is aligned to the final legislation, including

    1. The Corporate Governance Code (PDF) and Guidance on Audit Committees (PDF);

    2. The Ethical Standard for auditors; and

    3. Auditing and Quality Control  Standards, including revised auditor reporting requirements. (Alongside which the FRC is issuing a revised Scope and Authority of Audit and Assurance Pronouncements document).

  3. The FRC will delegate regulatory tasks to recognised supervisory bodies (RSBs). This is in line with a Ministerial Statement made in July 2015 and will be carried out in accordance with a Secretary of State direction. Accordingly the FRC has reviewed and carried forward the recognition of each RSB and each RSB has entered into a delegation agreement with the FRC. The delegation agreements are based on the FRC and RSB having a common objective to promote audit quality. At present they are temporary delegation agreements in order to facilitate implementation by the effective date. Longer term arrangements will be made by September 2016

  4. The RSBs will approve and register statutory auditors. The FRC has published eligibility criteria (PDF); and the Audit Register Regulations (PDF).

  5. The FRC will monitor directly the quality of PIE audits and certain other retained classes of audit bringing some 50 firms into scope compared to 10 firms currently. The FRC published on 1 April its inspection scope for 2016/17 (PDF).

  6. The FRC will carry out enforcement and sanctioning in connection with PIE audits and any other retained classes. Following consultation, the FRC has issued a new audit enforcement procedure and supporting documents, together with a feedback statement (PDF). Consequential changes have been made to the Audit Regulatory Sanctions Procedures and related guidance.

  7. The FRC may, on receipt of applications made to it by PIEs or statutory auditors, determine the date a PIE audit engagement began and authorise the extension of the duration of an engagement by up to two years or the relaxation of the financial cap on non-audit services. The FRC may also apply to court for an order to remove auditors. The FRC has published miscellaneous processes on how it will deal with these matters and publicise them.

  8. In order to be able to discharge its responsibilities and comply with the requirements of the legislation, the FRC has reviewed and amended its Governance Bible, including its Articles of Association (PDF).

Notes to editors:

  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.