From 17 June, the FRC will be responsible for oversight of the UK audit market as the competent authority while the Irish Auditing and Accounting Supervisory Authority (IAASA will be in charge of audits out of the Republic of Ireland, as the competent authority and will also issue auditing standards in the country.

Under the arrangements laid out in the Statutory Auditors and Third Country Auditors Regulations 2016 (SATCAR 2016), the FRC has responsibility for the regulation of statutory audit, including setting auditing and ethical standards, monitoring and enforcement.

The regulator says it will work closely with the audit recognised supervisory bodies (RSBs) in promoting the quality of audit and, where possible, will delegate regulatory functions to them. At present there are temporary delegation agreements in place, with the FRC saying longer term arrangements will be made by September 2016.

The FRC has published eligibility criteria which make it clear that no member or firm is eligible for or may accept an audit appointment unless registered by a RSB or the FRC as competent authority.
If the firm is not a sole practice, it must meet additional criteria. These are that each principal is either a member of a RSB; an audit affiliate of ICAEW, ICAS or ICAI who is subject to the rules of a RSB; a holder of a qualification granted by another RQB, an approved overseas qualification or an EEA audit qualification which has been assessed by ACCA as an appropriate qualification; a registered auditor; or is an EEA auditor or audit firm which is able to fulfil these requirements.

The FRC will monitor directly the quality of PIE audits and certain other retained classes of audit bringing some 50 firms into scope compared to 10 firms currently.
The FRC has developed a new audit enforcement procedure, including the steps it will take where there has been breach of regulatory requirements which is aimed at promoting the early conclusion of enforcement cases.

In a statement, Stephen Haddrill, chief executive of the FRC, said: ‘New UK auditing and ethical standards published today provide auditors with a comprehensive basis to comply with their updated obligations. The changes to the ethical standard set out the principles that underpin high quality, independent audit and, particularly for the audits of public interest entities (PIEs) strengthen auditor independence by prohibiting or restricting a range of engagements that could result in a conflict of interest.

‘Reflecting the FRC’s commitment to proportionate regulation, the revised standards contain some flexibility to allow an auditor to provide some additional assistance to smaller and medium-sized entities.’
Among the updates to the ethical guidance are changes to the length of time key audit partners can be allocated to the statutory audit of a PIE, which is reduced from seven years to a period of five years from the date of their appointment. Audit partners will not be able to participate again on that audit until five years have elapsed, rather than three years as previously.

The ethical guidance also states that ‘fees for engagements shall not be influenced or determined by the provision of non-audit / additional services to an entity relevant to the engagement.’ It states that the total fees for such services provided to the audited entity and its controlled undertakings shall be limited to no more than 70% of the average of the fees paid in the last three consecutive financial years.

In addition, the guidance says a firm must have adequate remuneration policies, including profit-sharing policies, providing sufficient performance incentives to secure engagement quality. It goes on to state: ‘In particular, the amount of revenue that the firm derives from providing non-audit / additional services to the entity shall not form part of the performance evaluation and remuneration of any covered person involved in, or able to influence the carrying out of, an engagement.’

The FRC may, on receipt of applications made to it by PIEs or statutory auditors, determine the date a PIE audit engagement began and authorise the extension of the duration of an engagement by up to two years or the relaxation of the financial cap on non-audit services. The FRC may also apply to court for an order to remove auditors. The FRC has published miscellaneous processes on how it will deal with these matters and publicise them.

Haddrill said the FRC has also issued updates to the UK corporate governance code and guidance on audit committees to reflect changes arising from the legislation on audit committees and auditor appointments, but has pledged to avoid further updates to the code until at least 2019.

Gilly Lord, PwC’s UK head of regulatory affairs, said: ‘The UK is ahead of most other EU member states as many will not have their regime finalised until after today’s application date. Currently, only eight member states have final legislation in place.

‘To achieve the FRC's objective of enhancing confidence in audit quality, we are looking forward to working with BIS, the FRC and the wider profession on common interpretations of the new rules. This will assist audit firms, audit committees, shareholders and the regulators themselves. Without this work, there is a risk that inconsistent practice could emerge.’

The FRC guidelines on eligibility criteria are here
The FRC’s revised ethical standard is here