Who are the 'qualified persons'?
Qualified persons are:
- individuals who hold an appropriate (audit) qualification;
- certain third country auditors; and
- audit-registered firms.
see paragraph 7(2) of Schedule 10 of the Companies Act
What is a simple majority?
A simple majority is more than 50%.
What is a ‘supermajority’
A super-majority is approval by more than a simple majority (for example, 75% approval, 90% approval etc.).
What type of decisions need to be controlled by qualified persons?
Decisions on all matters that direct the overall policy of the firm or alter its constitution. This applies to decisions made by holders of voting rights (under regulation 2.03b) and where such decisions are made by a management board of the firm* (under regulation 2.03c).
*Defined in the Audit Regulations as “The committee, board or other body which administers or manages the firm.”
Will ICAEW provide advice on whether a decision directs the policy of the firm?
This is likely to need a careful assessment by the firm, as explained in the Steps to be taken section. In broad terms, directing the policy of a firm means directing how managerial, financial and administrative mechanisms are to be arranged to reach explicit goals. While we can provide help to assist a firm’s assessment, the ultimate decision rests with the firm. It may be necessary for firms to take external legal advice on whether a certain decision does direct its overall policy.
Are there any voting matters that don’t need to be capable of control by qualified persons?
These provisions only apply to matters that direct the overall policy of the firm or alter its constitution. You may need to take advice on whether a particular matter falls within the scope of this revised definition of ’voting rights’.
Will ICAEW provide wording for our governance documents that complies with the Eligibility Criteria?
No. Firms need to draft their own governance documents. We are happy to help review and assess any proposed alterations that the firm prepares in connection with the Eligibility Criteria.
What happens if my firm is non-compliant?
The firm will be ineligible for audit registration and unless a short-term dispensation can be granted (see below) the firm will not be able to issue any audit reports and we will have to take steps to deregister the firm.
Can my firm apply for a dispensation to remain audit-registered while the ineligibility issue is remedied? If so, how long does the dispensation last and what does the application process involve?
A firm may be able to apply for a 90-day dispensation under the provisions in Audit Regulations 2.17-2.20, provided the firm can demonstrate it is taking all necessary steps to resolve the matter. Any dispensations will be considered on a case-by-case basis but in all cases cannot exceed 90 days starting from the date of the breach as stipulated by the Act. If we grant a dispensation, then during the period the dispensation is in place, the firm will be able to continue to act as a registered auditor and can issue audit reports.
If a firm remains ineligible at the end of the 90-day period, it must stop signing audit reports and we will have to take steps to deregister the firm. The firm will be able to reapply for audit registration in future, once the ineligibility issue has been resolved.
My firm is a limited company. We do not have a separate list of matters that require supermajority approval but the Companies Act specifies matters that require Special Resolution approval (ie by a majority of not less than 75%). Does there need to be sufficient qualified-persons to approve these special-resolution matters?
These matters will typically affect the firm’s constitution (eg, change of company name, amending the Articles of Association, winding up of the firm, reduction in share capital etc.). As such, firms that are limited companies will need to ensure they have sufficient qualified persons to approve any decisions that require a special resolution to be passed.
A limited company firm may be able to include provisions in its Articles of Association to deprive a certain class/type of shareholders of the right to vote in certain circumstances. We would strongly advise limited company firms to obtain legal advice on whether changes are needed to their Articles of Association to ensure qualified persons hold a majority of voting rights.
My firm’s constitution includes a list of ‘reserved matters’ where we cannot proceed with a matter on the list without a particular investor(s) / shareholder(s) approval. I am satisfied that some of these matters affect the firm’s constitution and/or direct its overall policy. How does this approach fit with the current Audit Eligibility Criteria requirements?
If the investor/shareholder whose approval is needed for the ‘reserved matters’ is not a qualified person (as defined in the Act) then the firm is likely to be in breach of the updated regulations, unless the firm has another mechanism that gives qualified persons the ability to vote on all matters that alter its constitution or direct its overall policy.
Firms with ‘reserved matters’ may need to take advice on what changes are needed to their governance arrangements to ensure the requirements of regulations 2.03b and 2.03c are met.
My firm’s structure includes several boards/committees that may have responsibilities for certain operational and strategic decisions. Do I need to assess each one to ensure decisions on constitutional alterations and direction of the firm’s overall policy are only made by boards/committees that are controlled by qualified persons?
Yes.
Help
For specific questions about the changes to the Audit Regulations and their impact on your firm’s ongoing eligibility, please contact auditregistration@icaew.com
For general assistance on regulatory matters, please contact: regulatorysupport@icaew.com
If your firm needs to apply for a dispensation, please contact auditregistration@icaew.com no later than 10 business days from when the eligibility breach occurred. An earlier application is recommended, to allow us time to assess the matter and issue the dispensation.