FRC proposes ‘more stringent’ ethical rules for auditors

The Financial Reporting Council (FRC) has issued a consultation proposing “important” changes to the UK’s ethical and auditing standards.

The FRC has proposed to set “more stringent ethical rules” for auditors, in response to findings from recent audit enforcement cases and from audit inspections. In response to feedback from investors, the FRC also has proposed 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.

It comes after the FRC published its latest audit inspections report, which found that the seven largest UK audit firms all failed to meet its quality target, relating principally to audits of companies’ December 2017 year-ends.

The report found that only 75% of FTSE 350 audits reviewed were good or required no more than limited improvements, compared with 73% in 2017/18, and no firms achieved the FRC’s audit quality target of 90%. Looking across all audit reviews completed at the largest seven firms, the outcome was 75% compared with 74% in 2017/18.

Key changes proposed 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 rather than another auditor.
• Enhancing the authority of the Ethics Partner function within audit firms, in order 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.
• 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.
• 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.

A statement by the organisation read: “The FRC recognises that there are a number of concurrent reviews of the UK audit market, including an Independent Review by Sir Donald Brydon looking at the quality and effectiveness of audit.

“These proposals are not intended to pre-empt the outcome of those reviews, or the direction of future government policy. They are focussed on improving current Ethical and Auditing Standards in the light of experience since the last major revision in 2016, to drive up the quality of audits being carried out in the UK, and to continue to promote public confidence in audit.”