The Financial Reporting Council (FRC) has issued a final draft of revised Ethical Standard 2016 to strengthen auditor independence by applying prohibitions to a range of audit engagements that could result in potential conflicts of interest for auditors
In its feedback on the changes to the ethical standard, the FRC said that these focus on measures to enhance auditor independence, including underpinning standards policy decisions to be reflected in UK legislation (such as retendering and rotation of the audit).
In the case of a public interest entity (PIE), the standards ban the provision of certain types of non-audit services, and subject others to a fee cap of no more than 70% of the audit fee calculated on a rolling three-year basis.
Auditors now need to consider their independence from the perspective of an objective, reasonable and informed third party. If such a party would conclude that an action would compromise the auditor’s independence, the auditor will need to ensure that action is not taken or they would no longer be able to undertake the audit engagement. The revised standard makes clearer the risks to independence posed by situations where the auditor acts as an advocate, and emphasises the prohibition which applies in all but immaterial situations.
FRC said the changes reflect its own review of ethical matters, changes to legislation which, after receiving parliamentary approval, are intended to take effect on 17 June 2016, and developments in international standards. The final drafts have been issued now, in order to allow companies and their auditors to familiarise themselves with the new requirements in good time.
Melanie Mclaren, the FRC’s executive director audit, said: ‘The updates to the code, guidance and standards implement a significant change in audit regulation in the UK which will be overseen by the FRC as a competent authority with the support of the accountancy professional bodies.
‘The changes will support further innovation by the audit profession in the UK, and ensure that auditors act in a way that is genuinely independent and seen to be in the public interest. The UK has led the way on promoting audit transparency and competition on quality so that investors can have confidence in corporate reporting.’
Final draft: Guidance on audit committees is here
FRC Revised ethical standards 2016 are here
