Covered person

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members interpret the definition of ‘covered person' in the FRC Ethical Standard.

Members may also wish to refer to the following related guidance:

• FRC Ethical Standard
• FRC Technical Advisory Group – Rolling record of actions arising (FRC Rolling Record)

The FRC Glossary of Terms – Ethics and auditing defines a ‘covered person’ as:

A person in a position to influence the conduct or outcome of the engagement.

For an audit engagement, the definition then continues in four broad areas (each of which is addressed in further detail below):

• The engagement team;
• Other people involved in the audit;
• Supervisory, management and oversight personnel; and
• Other persons in a position to influence.

A covered person includes:

(a)(i) Each member of the engagement team with responsibilities for managing the performance of the engagement (including the person(s) responsible for ‘day to day’ direction and supervision on site at the entity, and all more senior members of the engagement team above them) and persons who provide engagement quality control review for the engagement;

(a)(ii) All other members of the engagement team.

Definition of engagement team

The FRC Glossary of Terms – Ethics and auditing defines ‘engagement team’ as:

All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm.

It goes on to confirm that this includes the audit team, professional personnel from other disciplines involved in the engagement and those who provide quality control (other than the engagement quality control reviewer) or direct oversight of the audit engagement, but it does not include any external experts contracted by the firm.

Establishing whether an individual falls under (a)(i) or (a)(ii)

Determining whether an individual falls under (a)(i) or (a)(ii) can be difficult as those responsible for ‘day to day’ direction and supervision (i.e. those falling within (a)(i)) will vary. Depending on the audited entity, this may be an audit senior manager, manager or indeed someone more junior. It will, in effect, be the most senior member of the team on site at the audited entity. The FRC Rolling Record (21 July 2016 meeting) confirms that in relation to smaller audit firms with smaller audit engagements, the person responsible for the day to day direction and supervision of the engagement may in certain circumstances be either newly, or even part qualified. Anyone more senior will also be captured under (a)(i).

A covered person includes:

(d) Any other person within the firm or a network firm who, due to any other circumstances, is in a position to influence the conduct or outcome of the audit or other public interest assurance engagement.

The FRC Rolling Record (21 July 2016 meeting) states that this part of the definition is intended to cover senior people in the firm or network firm who may be, for example, acting in a mentoring role, either for a newly appointed partner, or others in the team who that mentor might be able to influence.

A covered person includes:

(c) Any person in the firm with supervisory, management or other oversight responsibility over:

(i) The engagement or the engagement partner or other key partners involved in the engagement; or
(ii) The conduct of audit or other public interest assurance engagements performed by the firm.

This includes each partner, principal, shareholder and other person in a firm:

a. At each level of the firm management, supervision or oversight relating to the audit or other public interest assurance engagement, up to and including individuals  who have ultimate responsibility for the management or governance of the firm; or
b. Who is in a position to prepare or approve (2016) or Who has a direct role in the preparation or approval of the performance appraisal and/or  remuneration of any individual defined in (a)(i), (b), (c)(i) and (c)(ii)

The FRC Rolling Record (21 July 2016 meeting) confirms that this part of the definition is intended to apply to those who have a direct role in the preparation and approval of a performance appraisal. This is not intended to be a ‘catch all’ situation where staff participating in a moderation meeting for a cadre of staff were all automatically to be considered as persons in a position to influence the outcome of the engagement.

A covered person includes:

(d) Any other person within the firm or a network firm who, due to any other circumstances, is in a position to influence the conduct or outcome of the audit or other public interest assurance engagement.

The FRC Rolling Record (21 July 2016 meeting) states that this part of the definition is intended to cover senior people in the firm or network firm who may be, for example, acting in a mentoring role, either for a newly appointed partner, or others in the team who that mentor might be able to influence.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Ethics Advisory Service on +44 (0)1908 248 250 or via webchat.