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Revised APB ethical standards on auditor independence 2011

The Auditing Practices Board issued, on 17 December 2010, a revised set of auditor independence standards.  These followed a lengthy set of consultations, details of which are available.

Implementation date

These apply from 30 April 2011 but there are transitional arrangements. Audit firms will need, however, to consider implementation measures before 30 April, in order to be ready at that date. The net effect of these arrangements is generally:

  • For audits of periods which commenced on or before 31 December 2010, the existing standards can be applied
  • For audits of periods commencing on or after 31 December 2010 (typically 31 December 2011 year ends and after), the new standards need to be applied. However:

    - The new measures do not need to be applied until 30 April 2011; and

    - Non-audit service and/or contingent fee arrangements that had been contracted before 31 December 2010 can continue to be carried out, even if prohibited under the new standards, until completed, or 31 December 2011 if sooner. As an amendment to ES5 issued on 16 December 2011, the APB has extended until 31 December 2014 the transitional arrangement for tax services provided on a contingency fee basis where contracts were entered into prior to 31 December 2010.

New requirements

The basic threats and safeguards approach has been retained but there are some additional prohibitions and specific requirements. These include, amongst others:

For all audits:

  • Tightening of some tax non-audit service and contingency fee restrictions;
  • Narrowing of the exemptions for providing valuations, etc where the auditor is permitted to carry out the work by law or regulation;
  • Widening of the definitions of contingent fee and of  those who cannot be remunerated or compensated for selling non-audit services;
  • Prohibiting auditors being an officer of the client;
  • Specific requirements in many areas (including providing restructuring services) to consider threats and apply safeguards – while already implicitly required, it is likely that documentation will need to be enhanced.

For listed company audits:

  • Prohibition on providing some types of restructuring services;
  • Enhanced disclosure to audit committees;
  • Tightening of prohibition on providing tax numbers to clients for use in the accounts;
  • A requirement to discuss fee ratios with the ethics partner where NAS fees exceed audit fees

preliminary overview of the key changes (Word doc 82.5KB/3 pages) is available to members. It should not be regarded as an exhaustive list of changes and is not a substitute for reading the standards.

FAQs have been set up for members in respect of the 2010 revised standards, dealing with early implementation issues.

These address:

  • The revised tax computation and tax contingent fee requirements (Provision of other services to audit clients)
  • Transitional arrangements re existing non-audit service contracts and changes to staff covered by the staff evaluation restrictions (Applicability of the guidance)

The revised APB ethical standards, and an APB feedback document is available from the FRC website.