Revised Ethical Standard 2019

Revised ethical standards

Written by: Jonathan Millar, Product Manager (Audit)

On 17^th December 2019, the FRC published a major revision to its Ethical Standard¹ and revised auditing standards in order to support the delivery of high-quality audits in the UK.

The revision came in response to audit inspections and enforcement cases and has set more rigorous ethical rules for auditors to follow.

Although many of the enhancements are directed at public interest entities (PIEs), the scope of the Ethical Standard applies to all audit engagements - as well as other public interest assurance engagements.

Key Changes in the Ethical Standard

Following the release of the exposure draft in July 2019, a review of the proposed changes in the September 2019 edition of Audit and Beyond², identified the following key changes, all of which were included in the final release:-

A clearer and stronger ‘objective reasonable and informed third party test’ which requires audit firms to consider whether a proposed action would affect their independence from the perspective of public interest stakeholders, rather than another auditor.
Enhancing the authority of the ethics partner functions within audit firms, requiring reporting to those charged with governance where an audit firm does not follow the ethics partner’s advice.
The list of prohibited non-audit services that auditors of PIEs can provide to audited bodies has been replaced with a much shorter list of permitted services.

The FRC also identified the following in their press release accompanying the revised standard:

Changes deliver stronger UK ethical requirements the FRC committed to implement
Tougher ethical standards strengthening auditor independence, and preventing conflicts of interest
New standard bans auditors from providing recruitment and remuneration services.

The FRC also stated that they would monitor the outcome of the Brydon Report and consider whether further changes to standards and their scope are necessary when the recommendations are implemented. *

The FRC also received wide-spread support on their consultation on whether further entities should be subject to the more stringent non-audit services requirements for PIEs. A decision on this was deferred until after the Brydon report was issued.

Implementation and Manual Updates

The Ethical Standard generally becomes effective on 15 March 2020.

Firms may complete engagements relating to periods commencing before 15 March 2020, in accordance with existing ethical standards, putting in place any necessary changes in the subsequent engagement period.

Engagements to provide previously permitted non-audit or additional services entered into before 15 March 2020, and for which the firm has already commenced work, may continue until completed in accordance with the original engagement terms (subject to the application of appropriate safeguards).

Mercia are currently planning an update to their Audit Procedures Manual towards the end of March / early April and this will be made available from our KnowledgeBase Download Area for Mercia Manuals in due course. Technical updates to the Audit Manuals themselves will be made later in the year.

* Addendum

On 30^th January the FRC added a further definition to their Glossary of Terms (Auditing and Ethics)³ for “Other entity of public interest”:

Other entity of public interest – An entity which does not meet the definition of a Public Interest Entity, but nevertheless is of significant public interest to stakeholders. This includes:
a) AIM listed entities which exceed the threshold to be an SME listed entity as calculated using the definition in this glossary;
b) Lloyd’s syndicates;
c) Private sector pension schemes with more than 10,000 members and more than £1 billion of assets, by reference to the most recent set of audited financial statements;
d) Entities that are subject to the governance requirements of The Companies (Miscellaneous Reporting) Regulations 2018 (SI/2018/860) by reference to the most recent set of audited financial statements, excluding fund management entities which are included within a private equity or venture capital limited partnership fund structure.

The full definition for a PIE can also be found in the Glossary of Terms.

*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.