The new FRC Ethical Standard
4 March 2020: the Financial Reporting Council (FRC) published the Revised Ethical Standard 2019 in December. It aims to strengthen auditor independence, prevent conflicts of interest and, ultimately, improve audit quality. But what are some of the key changes for audit firms?
Subject to the transitional provisions set out in paragraphs 1.69 to 1.72, the Revised Ethical Standard 2019 becomes effective on 15 March 2020, although engagements relating to periods commencing before 15 March 2020 may be completed in accordance with existing ethical standards.
Key changes include, but are not limited to:
- Third party test - The definition of objective, reasonable and informed third party now focusses on the perspective of an informed investor, shareholder or other stakeholder.
- Loan staff assignments - Loan staff assignments will generally be prohibited.
- Removal of contingent fees - Contingent fees will no longer be permitted for non-audit / additional services.
- Internal audit services - Firms will no longer be able to provide internal audit services to audited entities or their significant affiliates.
- Non audit services for public interest entities (PIEs) - Rather than providing a blacklist of non-audit services which must not be provided to PIEs (their parents or worldwide controlled undertakings), the Revised Ethical Standard 2019 now provides a whitelist of services which may be provided. If the service is not on the list, it must not be provided.
- Gifts and hospitality - The requirement to establish policies on the nature and value of gifts, favours and hospitality that may be accepted from and offered to other entities has been extended to apply to those entities which are likely to subsequently become audited entities. Guidance is available in our Gifts and hospitality
- Other entities of public interest (OEPIs) - A new term, other entity of public interest (OEPI) is introduced. This is defined as an entity which does not meet the definition of a PIE, but nevertheless is of significant public interest to stakeholders. The most recent version of the FRC’s Glossary of Terms – Ethics and Auditing explains in detail which entities are in scope of this definition. The interpretation is complex and guidance is currently being produced to assist. OEPIs will be subject to the same restrictions on non-audit / additional services as PIEs for periods commencing on or after 15 December 2020, although will not be subject to the 70% non-audit services cap.
- SME listed entities - SME listed entities were not previously subject to many of the prohibitions applied to listed entities more generally – this is no longer the case.
If you’re an ICAEW member, affiliate or member of staff in an eligible firm with member firm access, you may discuss your specific situation with the Ethics Advisory Service on +44 (0)1908 248 250.