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Regulation of Auditor Independence

An overview of the different independence rules that apply when undertaking an audit.

All members are required to apply ICAEW’s Code of Ethics (‘the Code’) in all of their professional and business activities. This includes, among other things, being objective. In addition, when carrying out an assurance engagement, independence is required, which can be considered to be a sub-set of objectivity, focused on the avoidance or management of particular relationships and activities that could, or could be seen to, compromise objectivity. For audits, auditor independence is required by law in the United Kingdom and most other countries.

For the purposes of this note, ‘members’ also includes affiliates, provisional members and, where relevant, firms registered with ICAEW to carry out audits.

ICAEW Code of ethics part 4A

In the absence of overriding national legal requirements, members apply part 4A of the Code. This is based on the International Ethics Standards Board for Accountants’ (‘IESBA’) Code of Ethics which is used widely around the world.

It applies ICAEW’s preferred ethics regulatory ‘framework’ approach of fundamental principles which must always apply, an analysis of threats to compliance, application of effective safeguards (or withdrawal from the engagement), together with absolute requirements and prohibitions only where no acceptable safeguard could reasonably be applied.

National legal requirements - general

Where there are specific national legal requirements in respect of auditor independence these must be applied. If they are at a standard that at least equates to that demanded in the IESBA (and therefore ICAEW) Code, the national requirements may be applied instead of part 4A. Otherwise, members need to consider of the requirements of part 4A go beyond the national requirements, and apply the stricter requirements in each case unless the Code states otherwise.

National legal requirements - UK

UK legislation (the Companies Act 2006) has required ICAEW and other audit supervisory bodies (RSBs) to adopt, as regards auditor independence requirements, the Ethical Standard for Auditors issued by the Financial Reporting Council (FRC). Therefore, when conducting audit engagements in accordance with ISAs (UK and Ireland), members are required by part 4A of the ICAEW Code to comply with the requirements of the FRC’s Ethical Standard for Auditors.

As noted in the Code, members complying with the FRC Ethical standard do not additionally need to apply the detailed provisions of part 4A of the Code. Further information on the interaction between the ICAEW Code and the FRC Ethical Standard is available here.

European audit regulatory reforms

In April 2014 the European Union Audit Regulation and revised Audit Directive were published. These apply from 17 June 2016 and impose additional independence requirements, over and above those in the previous APB Ethical standards and ICAEW’s part 4A. A revised final Ethical Standard including these changes and implementing Statutory Regulation were published on 17 June 2016 and take effect immediately for general requirements, or for audits of financial periods where those periods commenced on or after that date, in respect of individual audits. A further revision to the FRC Ethical Standard was issued in December 2019, to take effect for periods commencing after 15 March 2020.

Part 4A is derived from an international code, with wider scope than the European Union, so it will not automatically be altered to additional reflect EU requirements. That said, IESBA will bear the EU developments in mind in its on-going programme to review the IESBA code. As noted above, application of multiple independence standards will not be necessary.

Impact of Brexit on auditor independence

Substantially all of the additional requirements of the European Union Audit Regulation and revised Audit Directive have been incorporated into UK legislation or regulation through the Statutory Regulation referred to above, or the revised FRC Ethical Standard. Depending on what the final agreed Brexit arrangements are, there may be an opportunity going forward to revisit some of the aspects of the EU audit reforms that are seen to be ineffective, but on day one of our exit from the European Union (and presumably for some time to come), the Financial Reporting Council will retain ultimate responsibility for audit regulation in the UK and there will be no change of substance in the audit regulatory regime or the independence requirements that apply.