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FRC updates the Ethical Standard for Auditors


Published: 30 Jan 2024

Regulator says new requirements are proportionate to support confidence in UK corporate reporting and audit, to support UK growth and competitiveness.

The Financial Reporting Council (FRC) says it has simplified the existing ethical standard for auditors and clarified some areas following feedback, with the new requirements effective from 15 December 2024. The Ethical Standard was last revised in 2019.

An update to the FRC’s Ethical Standard for Auditors, published last week, aligns the UK with international standards and takes into account recent changes to the International Ethics Standards Board for Accountants (IESBA) Code of Ethics. These include changes related to information technology services, enhanced tax service prohibitions, recruitment and remuneration services and corporate finance services.

This will, the FRC says, help to ensure high standards of independence and ethical behaviour are applied consistently by UK audit firms and their networks. 

Meanwhile, a new, targeted restriction on fees from entities related by a single controlling party has been introduced in response to issues identified through FRC audit inspection and enforcement cases.

Additional proposed revisions relating to the reporting of inadvertent breaches have been removed, with the FRC recognising that the proposed revisions were “more likely to cause confusion and distract from the focus on professional ethics by practitioners”. At the same time, the FRC is enhancing the independence risk assessment around tax services provided to the controlling shareholders of unlisted companies rather than prohibiting them, as originally proposed.

The FRC says changes have been made following feedback to the FRC’s earlier consultation to ensure that the requirements in the standard are better targeted and proportionate. Other updates relate to personal financial independence, partner and staff rotation, and enhanced prohibitions where an audit firm’s independence could be threatened by an over-reliance on fees. 

The FRC has produced a summary of key changes, alongside guidance for auditors on the application of the Objective, Reasonable and Informed Third Party test, which forms a key part of many requirements in the Ethical Standard.

Mark Babington, Executive Director of Regulatory Standards at the FRC, says: “The revised ethical standard has been simplified to ensure auditors are clear as to the high ethical standards expected, while the limited number of new requirements are proportionate and balanced to support trust and confidence in UK corporate reporting and audit – and, in doing so, helping to support UK growth and competitiveness.”

ICAEW supports the FRC’s key objectives of enhancing confidence in audit, ensuring that consideration of the public interest is placed at the core of UK audit firm culture, and strengthening auditor independence. 

ICAEW said it was pleased to see that points made in its representation to the Call for Evidence were reflected in the update. In particular, suggestions for improving defined terms will be taken into an ongoing project to revise the FRC Glossary, and revisions have been made to the proposed wording relating to breach reporting, which ICAEW felt was confusing. The FRC also accepted the recommendation of ICAEW and others that it should develop a roadmap for the future development of ethical and assurance standards.

However, ICAEW’s Laura Hough, Director, Reputation and Influence, Trust and Ethics, warns that challenges remain. “As stated in our representation, we would still like to see the explanation for the changes that have been made, detailing the rationale behind the change and indicating the desired change in behaviour.”

Hough also says that revisions to the Ethical Standard designed to better align it with the IESBA Code may be hindered by use of different terminology. “It would be clearer for firms – and therefore facilitate compliance – if the wording included in the Ethical Standard mirrored the wording from the IESBA Code.”

Proposed changes to 'professional behaviour' provisions in ICAEW Code of Ethics

ICAEW is consulting on proposed changes to the fundamental principle of professional behaviour in sub-section 115 of the ICAEW Code of Ethics. To have your say get in touch before 9 February 2024.

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Aligning with Global Ethics Day on 18 October, ICAEW is emphasising the vital importance of ethics to the accountancy and finance profession.

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