Trustee of trust with shares in an audit client

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to determine how relationships can impact audit independence. In particular this helpsheet considers whether a firm can continue to act if a partner in the firm is a trustee of a trust that holds shares in an audit client.

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

• Covered Person
• FRC Ethical Standard

Subject to the transitional provisions set out in paragraphs 1.69 to 1.72, the FRC Ethical Standard 2019 becomes effective on 15 March 2020. This helpsheet addresses the requirements of both the FRC Ethical Standard 2016 and the FRC Ethical Standard 2019. Paragraph references are labelled 2016 or 2019 accordingly.

Where a direct or indirect financial interest in an audited entity (or any affiliate of such an entity) is held in a trustee capacity by a covered person, or by a person closely associated with them, a self-interest threat may be created because either the existence of the trustee interest may influence the conduct or outcome of the audit or the trust may influence the actions of the entity (paragraph 2.18 (2016) or 2.16 (2019) of the FRC Ethical Standard).

Specifically a trustee interest cannot be held in any of the following circumstances:

• If the trustee is an identified potential beneficiary of the trust; or
• If the financial interest is material to the trust; or
• If the trust is able to exercise significant influence over the audited entity or its affiliates; or
• If the trustee has significant influence over the investment decisions made by the trust, in so far as they relate to the financial interest in the audited entity; or
• If the holding is otherwise prohibited by paragraph 2.4D (2016) or 2.4 (2019) (see below).

All these restrictions must be adhered to. For example, if the trust’s only or principle asset is shares in the audit client the investment would be material and therefore the engagement partner, could not be a trustee.

Paragraph 2.19 (2016) and 2.17 (2019) states that if it is unclear whether the financial interest in the entity held by the trust is material to the trust, or whether the trust is able to exercise significant influence over the entity, the details of the financial interest should be reported to the ethics partner / function, so that a decision can be made as to the steps that need to be taken.

In smaller firms it may well be that all the firm’s partners will be excluded from holding such interests by the definition of covered person which includes all individuals with ultimate responsibility for the management or governance of the practice (see Covered Person helpsheet).

It is possible that partners (especially in larger firms or those organised in separate divisions) do not fall within the definition of a covered person. In these circumstances we recommend that the firm document their conclusions and implement appropriate safeguards. There will, nevertheless be some circumstances in which the self-interest threat created will be considered too great to be overcome by way of safeguards.

Paragraph 2.4D (2016) or 2.4 (2019)

If a person falls within the scope of this paragraph the trustee holding cannot be held. This is because the prohibitions in paragraph 2.4D (2016) or 2.4 (2019) of the FRC Ethical Standard prevent the firm, key audit partners, directly involved covered persons for the engagement (and people closely associated with them) from:

• Holding any material financial interest in any entity relevant to an engagement in the area of activity in which they are involved; or
• Holding any financial interest (whether material or not) in:
• an entity relevant to an engagement for which they are an directly involved covered person; or
• an entity which is an affiliate of such an entity; or
• any other related entity where holding such a financial interest may cause, or be perceived as causing, a conflict of interest.

These prohibitions also extend to anyone else who is involved in the audit if their services are at the disposal or under the control of the firm. This includes services provided by external consultants.

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.