The Financial Reporting Council (FRC) has issued a major revision of audit and ethical rules in its new Revised Ethical Standards 2019 with the aim of strengthening auditor independence and to prevent conflicts of interest.
The major changes to the FRC’s Revised Ethical Standards 2019 report include limiting auditors:
- From supplying recruitment and remuneration services,
- From supplying tax advice,
- From playing any part in management decision making,
- To providing non-audit services which are closely linked to the audit itself or required by law or regulation.
The report was published in conjunction with an official review of the audit industry by Sir Donald Brydon, the former chairman of the London Stock Exchange. He calls for further deep changes to the audit industry, going beyond the new ethical standards. His view is that auditors should be separated from the accountant role. Their duty should be to assess a company's 'resilience' and other factors, going beyond certifying accounts as a 'true and fair view'.
The most restrictive application of the new rules will be aimed at public interest entities (PIEs), i.e. banks, listed companies, insurers etc.
The FRC says the move will, “Dramatically reduce the risk of a damaging conflict of interest, where the commercial interests of an auditor are perceived to be the most important factor in an audit relationship, rather than a focus on high quality audit”.
For the first time, the standard lists permitted non-audit services, rather than prohibited ones (see Section 5, subsection C), on the grounds that the prohibited list had been open to misinterpretation.
The strengthened ethical standards include analysing potential conflicts of interest. The rules demand that the ‘engagement partner’ is responsible for assessing any threats to the integrity or objectivity of an audit and flagging anything that might impair independence on an “individual and cumulative basis”.
These changes should be seen as part of the ongoing shakeup of financial reporting rules which include the future transformation of the FRC into the Audit, Reporting and Governance Authority (ARGA).