FRC Ethical Standard: Persons closely associated

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members interpret the definition of ‘person closely associated’ 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 states that a ‘person closely associated’ is:

1. A spouse, or a partner considered to be equivalent to a spouse in accordance with national law;
2. A dependent child, in accordance with national law;
3. A relative who (at any time in the period from the start of the financial period in respect of which the engagement is being conducted to the date on which the engagement report is signed) has lived in the same household as the person with whom they are associated for at least one year;
4. A firm whose managerial responsibilities are discharged by, or which is directly or indirectly controlled by, the firm / person with whom they are associated, or by any persons mentioned in (a), (b) or (c) or in which the firm or any such person has a beneficial or other substantially equivalent economic interest;
5. A trust whose managerial responsibilities are discharged by, or which is directly or indirectly controlled by, or which is set up for the benefit of, or whose economic interests are substantially equivalent to, the firm / person with whom they are associated or any person mentioned in (a), (b) or (c).

Relative

The FRC Rolling Record (15 June 2016 meeting) states that audit firms should use the HRMC definition of relative, which is a linear definition:

A relative is a brother, sister, ancestor or lineal descendant. This means that people like cousins are not relatives for the purposes of this definition. This also captures a spouse or civil partnership.

Household

The definition of ‘household’ has not been addressed by the FRC. The Collins dictionary includes a practical definition:

A household is all the people in a family or group who live together in a house.

This would mean that you and any other occupant living under the same roof, at the same physical address, would be considered to be part of the household. Consideration should however be given to flexible, casual and varying living arrangements whereby one or more occupants may not necessary be seen to continuously reside.

The reference to ‘household’ in the definition of ‘person closely associated’ is intended to cover those who interact with you closely enough to be able to exert influence.

While this should clarify most situations, there may be a handful of cases of doubt where people live in a number of places. In his situation it may be helpful to consider ‘primary residence’, in determining whether an individual is a member of a household. Primary residence is not defined in law but over a number of years there have been several tribunal / court cases which have determined what is and is not a primary residence.

Some examples of personal considerations for the individual when determining their primary residence are listed below. It is the address by which:

• Your family reside (husband / wife / spouse / spousal equivalent / children);
• At which residence you are registered with a doctor / dentist;
• Where the majority of your possessions are kept;
• Where you return to during periods of leave or at the end of employment;
• Your long-term intentions;
• Where you are registered to vote;
• Membership of clubs and other social activities;
• Where you receive post; and
• The property you regard as your main residence.

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.