FRC proposes changes to ethics and audit standards

The Financial Reporting Council (FRC) wants to change, among other things, the way firms test for independence and the authority given to ethics partners within firms

The watchdog has launched a consultation on proposed changes that focuses on restructuring and simplifying UK ethical standards, and providing clearer and more enhanced requirements for auditing standards.

The FRC has proposed “re-defining the ‘objective, reasonable and informed third party test’” by replacing the “extant definition with one which has greater focus on the perspective of stakeholders who are the ultimate beneficiaries of assurance”.

It also suggested it would provide firms with better guidance on how to make these assessments.

The FRC has also called for ethics partners within firms to be provided more authority to ensure that firms are all more focussed on ethical matters.

It would also “require reporting to those charged with governance” when a firm does not follow advice given by these partners.

Stephen Haddrill, chief executive of the FRC, said that recent failures by corporations and weaknesses in the FRC’s own enforcement work indicates the need to strengthen standards.

“Our audit inspections and enforcement activity continue to identify a lack of professional scepticism and independence as being key points of failure when things go wrong,” said Haddrill.

He added that “confidence in the independence of auditors” and better understanding of their judgements was the only way to ensure continued investment in the UK.

The change would “strengthen and clarify ethical requirements in the public interest,” he said.

It would also replace the list of prohibited no-audit services that auditors of public-interest entities can provide with a “list of permitted services” that are all “’closely related’ to an audit or required by law and/or regulation”.

These, the FRC says, would be the only services that auditors of PIEs could provide.

Finally, the FRC would require auditors of UK-listed entities to include the “performance materiality threshold” that was used when publishing their audit reports.

It acknowledged the concurrent reviews into the audit market in the UK, such as that by Sir Donald Brydon, saying that its proposals “are not intended to pre-empt the outcome of those reviews, or the direction of future government policy”.

In March, the government backed proposals in the Kingman Review that the FRC be abolished in favour of a new regulator, the Audit, Reporting and Governance Authority.

Consultation on the proposed changes to the ethical and auditing standards closes 27 September.

Originally published in Economia on 17 July 2019.