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The Revised Ethical Standard 2019 still presents implementation issues for some audit firms and the next update will provide fresh challenges. David Isherwood and Rupak Vasishta share key reminders, including the Third Party Test.

The Financial Reporting Council’s (FRC’s) Revised Ethical Standard 2019 (ES) came into effect on 15 March 2020, shortly after Sir Donald Brydon delivered the last of three major reports looking at audit, audit regulation and the audit market.

Roll forward two and a half years. We recently received the UK government’s response to these reports and its plans for action, followed by a position paper from the FRC, setting out how it will support the government’s plans. The FRC’s position paper focuses on five broad areas and notably includes, as a priority, plans to update the ES revised in 2019, and briefly lists significant changes. It seems fitting, therefore, to look back at both the highlights and the challenges involved in implementing the current version.

Principles and provisions

Part A of the 2019 ES sets out the overarching principles of integrity, objectivity and independence, together with supporting ethical provisions, and these provisions have proved to be a very important aspect of the revised standard.

In combination with the ‘Third Party Test’ they have enabled practitioners and firms to better apply the ES to a wide range of facts and circumstances; particularly in situations where some of the more detailed provisions in Part B don’t quite fit or where the judgements have been fine. It can be tempting to skip Part A of the standard, but it is valuable to bear it in mind whenever analysing situations and judging the ethical outcomes.

Threats and safeguards

The conceptual framework of threats and safeguards is not new; it has been in international and UK ethical codes and ethical standards for many years. But the additions to this concept made by the FRC in the 2019 ES have been a challenge for many firms and practitioners to comply with – in particular, the new requirement relating to the timeline of documenting the threats and safeguards.

The fact that this documentation must be fully complete before any non-audit service is committed to, and before an engagement letter is issued, is a provision that requires very rigid engagement acceptance procedures, tight control activities and diligence by all individuals involved. Often these analyses are performed in face-to-face meetings and if the resulting documentation is not completed before the non-audit service is committed to, this is no longer just a lapse, it is a breach of the ES.

Non-audit services prohibitions

The 2019 revision of the ES also brought in a suite of additional prohibitions concerning the provision of non-audit services to audited entities and it is important to remember that many of these prohibitions affected all audited entities, not just those designated as public interest entities (PIEs).

In particular, the prohibitions on contingent fee arrangements, secondments, internal audit services and remuneration services have perhaps had a big impact on some of the smaller accounting firms, where full-service-type arrangements were more common. Equally, for those firms that audit global groups, ensuring that overseas network firms comply with these additional restrictions has needed extensive education sessions and updated templates and controls.

For the firms that audit PIEs, the introduction of a permitted list has put a focus on the definition of services within firms’ internal service catalogues, and elevated the importance of planning many years ahead – for both firms and audit committees – to enable tendering in future years.

The ‘Third Party Test’

While the ‘third party’ concept is not new in the world of ethics, the 2019 ES further emphasised the importance of applying the ‘objective, reasonable and informed third party’ (ORITP) test to all ethical decisions and judgements. It essentially reinforced that principles should take priority over the rules.

The use of multiple third-party proxies was also introduced. This was an important change that meant the ORITP could not be another practitioner.

In our firm, the ORITP test typically factors into most of our day-to-day judgement calls and decision-making on ethical matters. Additionally, it’s quite often incorporated into our policies and documentation requirements. For example, it features heavily in our gifts and hospitality policies and all of our non-audit service documentation requires specific comment on an assessment against the ORITP test.

We appreciate that a third party’s view can change over time depending on a number of considerations – for example, what the current public interest sentiment is. We have therefore incorporated the third party test in every one of our annual training modules since the 2019 release of this revised ES. This is to keep our people updated on the expectations of how the ORITP test should be applied and also help it to stay in the front of people’s minds.

In today’s world, we continue to see the challenge to demonstrate to others where we are evidencing that our conclusion is from a third party’s view. For example, in our firm, for a particular critical judgement, we put together a consultation panel consisting of our independent non-executives – and by involving them we demonstrate the view of a third party.

What’s on the horizon

As noted at the beginning of this article, the FRC has already stated that it intends to update its 2019 ES – and it expects to consult on a revised standard in Q1 2023. We know that this update will reflect some of the more recent changes from the International Ethics Standards Board for Accountants, including those in relation to ‘fees’ and ‘non-audit services’, and we also know that the FRC will be considering the effect on the ES of the UK government’s recent proposals regarding the definition of a PIE.

Perhaps more importantly, though, we believe that the profession’s continued compliance with the spirit, not just the letter, of the standard will be key to enhancing both trust in, and value of, our audits.


Faculty webinar

The audit profession has had more than two years to digest and apply the Revised Ethical Standard 2019 (ES). In a recently recorded Audit and Assurance Faculty webinar, ethics specialists from BDO draw on the firm’s experiences with applying key changes in the revised ES. They also explore some requirements in more detail and highlight emerging issues for firms to consider. They:

The faculty webinar recording is available on our website.

Additional ethics-related resources

Resources accompanying the webinar that readers may find useful include:

ICAEW’s Code of Ethics can be found in the Ethics Hub along with related resources. These include: auditor independence; what is meant by acting in the public interest; integrity; case studies on ethical dilemmas; ethics and new technologies; and where to find help with ethical problems.

About the authors

David Isherwood, Ethics Partner, BDO, and Rupak Vasishta, Director, Ethics Team, BDO

Audit & Beyond

This article was first featured in the October 2022 edition of Audit & Beyond.

Audit & Beyond October 2022