Any firm wanting to carry out regulated audit work in the UK needs to register with a recognised supervisory body, such as ICAEW, and comply with that body’s audit regulations. Whether you’re registering with ICAEW for the first time, or reapplying due to a restructure, what can you do to make the process go smoothly?
Problems with governance documents – such as articles of association and shareholders’ agreements for corporate entities, partnership agreements or limited liability partnership agreements – are often found during the registration process. This is usually because firms have not fully appreciated the eligibility criteria or how the structure of their firm, and its voting mechanisms, might affect eligibility. The Audit Regulations require audit-qualified (AQ) individuals (and/or other audit registered firms) to hold the majority of the voting rights (or equivalent rights under the firm's constitution) for a firm to meet the criteria.
When setting up or changing the structure of a practice, firms always need to be alert to audit eligibility requirements and the need for people with an audit qualification (and/or registered audit firms) to have control and how to incorporate that within their governance documents. It’s important to consider this early on in the process before it becomes difficult to make changes. “If a firm can’t demonstrate the necessary control in their governance documents, we can’t authorise them because they don’t meet the eligibility criteria,” explains Claire Hicks, Senior Case Manager, Regulatory Practice, ICAEW. So firms need to pay more attention to this aspect when setting up their entities, and they need to read the regulations and guidance carefully.
Another, and related, area of confusion is when corporate entities own a firm wanting to register to carry out audit. A compliant audit firm’s majority voting rights must be held by AQ individuals and/or other registered audit firms. Where those voting rights are held by a corporate entity (or entities) the eligibility of the firm is not assessed by looking through the structure to who the ultimate controlling parties are. Instead, we must look at the parties that hold the immediate voting rights in the firm - which in a corporate structure are usually held by the intermediate or parent holding entities.
“People tend to think if they’ve got four corporate entities owning their firm and each entity is owned by an AQ member, they think that those AQ members hold the interest in that firm,” says Hicks. “But we don’t look through that; we’re not allowed to under the regulations, so it’s those individual corporate entities that we look at as owning the audit firm. ”The implication of this, explains Nick Reynolds, Senior Manager, Quality Assurance, ICAEW, is that in a structure where there are a number of companies with interconnecting control, there may need to be more than one registered audit firm.
“We need a firm to be controlled by individuals who hold an audit qualification; but they may be one layer back from holding that interest,” says Hicks. “That individual doesn’t own 75% of the shares; they’ve got a corporate entity that they own that owns 75% of the shares. In that scenario, we would need their corporate entity to also apply for audit registration – we would need two audit applications. Both entities need registering.”
Fill in the right forms
Apart from checking eligibility and ensuring you can demonstrate control, there are other things you need to get right from the outset. It might seem basic, but make sure you use the correct version of the application form, fill it in accurately (and completely) and pay the right fee. The most up-to-date version of the application form is available on the ICAEW website, so download it from there each time you need it, rather than relying on a saved copy, which may have since been amended. In addition to the main application form, there may be other forms you need to send in, such as responsible individual forms for those who will be signing off audit reports, or application forms for affiliate status for principals.
To help firms navigate this suite of forms, there is guidance online. But if you are still in any doubt, contact ICAEW’s regulatory support team. An incorrect or incomplete application can hold up the whole registration process, but is simple to avoid if you ask for help early on. You must also supply a copy of your letterhead, so if you are using the audit legend, please make sure that you have the right version on your letterhead. And don’t forget to show you have an appropriate level of professional indemnity insurance (PII) with an ICAEW participating insurer. This should not have any relevant exclusions in it, and must have sufficient time to run before expiry.
No rubber stamp
Something many firms underestimate is the time required to approve an application. “We’ve had a number of applications submitted recently where there have been fewer than four weeks to go before their restructure happens,” says Hicks. “We need eight to 12 weeks processing time; there are a lot of things we need to check to ensure the application(s) can be approved.”
Similarly, Griffiths has had firms tell her they didn’t realise how long it would take to get approval. “It’s almost that they feel it’s a rubber stamp exercise, and that provided they can fill in the forms and answer the questions, we’ll tick it through and approve their status,” she says.
But this is not the purpose of registration. The eligibility criteria and other compliance requirements are drawn up to protect the public interest and ensure competence. “We have our own oversight by the FRC, so we have to ensure we’re not letting people through who are not competent. We have to have rigour in the process; it’s not a rubber stamp,” says Griffiths. She urges firms “to talk to us early on if they have deadline in mind” and provide advance warning if they are restructuring.
Reynolds sums up the registration process as follows: get your structure right; recognise this is not just a tick box exercise; and then, once registered, make sure that every time you restructure or bring in someone new, you understand this can have implications and that we need to be told.
For more information on how to become audit registered, see here.
Registered auditor technical helpsheet – providing guidance on the more common reports prepared by accountants which require signature by a registered auditor.
To become audit registered by ICAEW, your firm needs to:
- fill in the application form or forms (and all the necessary documentation)
- satisfy ICAEW's Audit Registration Committee that it meets the eligibility criteria and is a fit and proper firm to carry out audit work
- pay an annual audit registration fee
- comply with the Audit Regulations and Guidance
- comply with Professional Indemnity Insurance Regulations
- be monitored by ICAEW
- check your eligibility status