Auditors in the UK are now banned from providing recruitment and remuneration services to the public interest entities they audit or taking any part in management decision-making, following the Financial Reporting Council’s (FRC’s) adoption of tougher international ethical standards

The decision to implement the ethical requirements means that all public interest entity auditors from now on can only carry out non-audit services which are closely linked to the audit or required by law or regulation.

The FRC says that the move will go a long way towards strengthening auditor independence and preventing damaging conflicts of interest. Too often in the past, the size of the auditor’s fee income from non-audit services has given rise to the perception (at least) that commercial interests have been placed ahead of audit quality in the audit relationship.

As the Revised Ethical Standard 2019 makes clear, such conflicts of interest “create a potential risk (threat) that the practitioner’s judgment or actions in conducting or determining the outcome of the engagement may be unduly influenced by interests other than those of the intended user” (the shareholders).

“Such other interests are potentially wide-ranging and will usually be legitimate in themselves (though they may also not be so). However, if the practitioner is unduly influenced by them, this may prejudice the interests of the intended users, which should be paramount.”

The last time the Ethical Standard and auditing standards were revised was in 2016 when the EU Audit Regulation and Directive were implemented in UK law.

Not only did the new legislation introduce mandatory tendering and a cap on the level of non-audit fees firms could earn from audit clients, but it also placed restrictions on what services they could offer those clients – for the first time, for example, the blacklist included the provision of certain tax advice and compliance services, as ell as designing and implementing internal controls.

Since then, the FRC says, audit firm fee income from non-audit services provided to audit clients has fallen by 8% and no audit firm has asked the regulator to waive the non-audit services fee cap.

It also hails the fact that audit committees generally “no longer consider their auditor to be the default provider for non-audit services” as a positive change.

“High quality audit supports the effective functioning of capital markets and gives investors confidence,” FRC chief executive Sir John Thompson said.

“Where audit fails, that confidence is undermined. The steps we have taken in revising our standards include measures which our stakeholders have identified as important to strengthen their confidence in audit, by ensuring greater independence and a focus on delivering high quality and consistent work.”

As well as revising the Ethical Standard, the FRC has simplified and clarified the text. It has also added application guidance to the revised auditing Standards to make clear how an auditor should respond to requirements.

During the two consultations on the proposed guidance to the standards, the FRC asked for views about whether further entities should be subject to the more stringent non-audit services requirements for public interest entities. The idea garnered widespread support.

The FRC says it has deferred the decision until early in the New Year after Sir Donald Brydon has issued his report on the future of audit, “to ensure a consistent approach”.

Originally published in Economia on 17 December 2019.