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 said its 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
- Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society
The FRC added that these final principles follow “extensive discussions” with the audit firms, and the UK watchdog is now asking the Big Four firms to agree to operational separation of their audit practices on this basis and to provide a transition timetable to complete implementation by 30 June 2024 at the latest.
An implementation plan should be submitted to FRC by 23 October 2020, afterwhich the FRC will then agree a “transition timetable” with each firm.
FRC CEO, Sir Jon Thompson, said: “Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the United Kingdom following the Kingman, CMA and Brydon reviews.
“Today the FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm.”
He added: “The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time.”