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NEW AUDIT ETHICAL STANDARD: SHAPE UP FOR THE SHAKE-UP

Jul 13, 2020

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The FRC (Financial Reporting Council) have made some big changes to the Ethical Standard around auditor independence. 

These changes impact businesses of all sizes. And they may impact the non-audit services which your auditor can provide, including tax, secondments and accounting support, meaning you might need to explore relationships with other advisers to meet your non-audit needs.

This news comes after increasing scrutiny on the audit industry following high profile failures such as Carillion, and the direction is clear: to separate audit from non-audit services, improving independence and transparency in the industry.

The Big 4 audit firms have been given a deadline of 2024 to operationally separate their audit practices from non-audit services, and the FRC have now introduced further restrictions on the nature and extent of additional services your auditor can provide.

So, what’s changed? And what does all this mean for you?

THE SHAKE-UP: WHAT’S CHANGED?

From 15 March 2020, the following non-audit-services are prohibited for all audit clients, meaning your auditor can no longer provide:

  1. Internal Audit Services – unless there is a direct link to the statutory audit
  2. Secondments – your audit firm can no longer loan or second staff to you to support your business
  3. Information Technology Services – where the systems designed, provided or implemented would be relied upon as part of the audit
  4. Tax advocacy services for any audit clients where the audit firm would be acting as an advocate on your behalf. For example, supporting you in defending a tax treatment under enquiry
  5. Contingent fee arrangements for all services provided to an audit client – for example, R&D or capital allowances claims

There are also restrictions around the level of accounting services that your auditor can provide where matters require a high degree of professional judgement. For example, giving advice on the implementation of new or upcoming accounting standards.

OK, SO DOES THIS APPLY TO ME?

The new rules apply to all audited entities.

If you are classed as a ‘SME Listed Entity’ or an ‘Other Entity of Public Interest’ there are some further changes, too.

SME listed entities provision

Previously, special provisions existed for ‘SME listed entities’ which exempted them from the full non-audit service rules which applied to larger, listed businesses. In the new standard, those special provisions have been removed.

This means that all AIM and other listed businesses face further restrictions on what services their auditors can provide, including accounting services and preparing the current and deferred tax calculations.

OEPIs

‘Other Entities of Public Interest (OEPI)’ is a new category the FRC has introduced, and entities within it include:

  • AIM companies with a market capitalisation at or over 200m euros (on a 3-year average basis)
  • Lloyds syndicates
  • Private sector pension schemes with over 10,000 members and over £1bn assets
  • Unlisted companies with more than 2,000 employees or turnover of more than £200m and more than £2bn in assets.

Except for a very narrow list of audit-related and regulatory reporting services, all non-audit services are prohibited for OEPIs.

WHEN DOES THIS APPLY FROM?

This Ethical Standard took effect for periods commencing on or after 15 March 2020, except in the case of ‘Other Entities of Public Interest (OEPI)’. Here, the restrictions will apply to periods commencing on or after 15 December 2020.

Transitional provisions

If you agreed engagement terms around previously permitted non-audit or additional services before the transition date, that’s fine. The work can continue until it’s completed in line with those original terms, subject to the application of appropriate safeguards where work has already commenced.

WHAT SHOULD I DO NOW?

With the rules in effect, you should act now to review the current services provided by your auditor to assess if there are any independence concerns. Speak to your auditor and get their advice on whether any non-audit services provided by them fall under the new restrictions.

Where the new rules impact your business, consider talking to other advisers to retender those non-audit services as soon as possible. See here for more detail about changing advisers in this current climate.

Furthermore, many larger businesses are now considering that it is ‘best practice’ to separate their audit and non-audit services, even where no formal restrictions exist.

HOW CAN WE HELP?

We’d be delighted to have an initial discussion with you about how we might be able to support you with non-audit services going forwards. From accounting support, internal audit and secondments, to business tax and R&D, we’re here to help.

So, if you have any questions or you’d like some support or more detail, get in touch with your usual CP contact, Sarah Kirkby or Cat Kelly.

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