Changes to the audit regulations - November 2013
The Audit Regulations have been updated with effect from 11 November 2013 to take account of the Financial Reporting Council's (FRC) Auditor Regulatory Sanctions Procedure (ARSP) which is being published simultaneously.
The changes follow from the FRC governance review in October 2011, the agreed elements of which were enacted by Statutory Instrument (SI) 1741 in July 2012. Under article 5 of the SI, the FRC was given the power to determine sanctions against audit firms directly without reference to the recognised supervisory bodies. A draft ARSP was issued in December 2012 to set out how this might apply in practice and, in particular, to explain the appeal mechanisms associated with it.
The sanctions regime applies to those firms that are the subject of inspections by the Audit Quality Review team and, as these are firms that carry out significant numbers of major audits, this policy only affects a small number of firms that are registered for audit with ICAEW.
Although ICAEW has been asked to apply the sanctions by the FRC, we are doing this on behalf of the FRC and not as part of the audit regulations. The regulations have therefore been amended to ring fence this particular activity and establish how they operate alongside the procedures operated by ICAEW.
A key part of the ARSP is the appeal mechanism which enables firms to challenge any sanction that the FRC may have applied. This is separate to the appeals system set out in Chapters 8 to 9 and therefore the introduction to those chapters has been amplified to reinforce this point. In addition, regulations that address appeals against sanctions have been ring fenced to decisions of the Audit Registration Committee.
The sanctions determined by the FRC are to be treated as issued by ICAEW itself. Chapter 7 sets out how this will apply in practice, and there are new regulations 7.00 and 7.00A.
Regulations 7.02, 7.03 and 7.06 have been modified to accommodate FRC findings, and to indicate how the transition between regulatory regimes might be handled. This could arise, for example, if a firm ceases handling major audits during a sanction period.
As ICAEW is charged with implementing the sanctions, it follows that the enforcement regulations of the Audit Regulations continue to apply; so, for example, 7.03f has been amended and 7.03j added to enable the Audit Registration Committee to apply its own sanctions for non-compliance with sanctions levied under the ARSP. Interestingly, these particular sanctions can be appealed against using ICAEW's appeals procedure, provided they are not challenging the underlying FRC decision where the ARSP would apply.
We have also taken the opportunity to amend the names of bodies that have changed and to add a clarifying paragraph around continuing professional development.
- The Professional Oversight Board has been changed to the Financial Reporting Council.
- The Audit Inspection Unit is now the Audit Quality Review team.
- The Financial Services Authority is now the Financial Conduct Authority.
In the case of CPD, guidance has been added to regulation 3.17 to the effect that where individuals are registered themselves with one regulatory body, but their firms with another, then the most demanding CPD regulations of either body apply. This is mainly to address the impact of the Professional Qualifications Directive 2013 where overseas CPD requirements may be less comprehensive than those of the UK.