Strengthening standards and dealing with Brexit
Today, 5th March 2019, the FRC issued a position paper regarding its intended approach to strengthening both auditing and ethical standards in the light of recent criticisms. In summary, changes will be made (or considered) to:
- Make the audit more responsive to the needs of users and the legitimate expectations of the public
- Strengthen the quality and consistency of audit work
- Strengthen auditor independence, including reducing conflicts of interest
- Further strengthen the “objective, reasonable and informed” third party test which is used to judge whether an auditor is independent
- Simplify the language used in the FRC Ethical Standard (ES) to ensure clarity
- Which audits need a higher level of independence (this may be wider than PIEs as currently defined)
- Extend the requirement to comply with the ES to all components, wherever they are based
- Determine how firms should publicly report that they have the skills and resources necessary for the audit, as required by the ES
- Prohibit all non-audit services (except audit-related ones) for PIE audits
- Enhance the authority of the Ethical Partner and the ethics and compliance function within firms
- Further clarify and potentially extend, the auditor’s responsibility with regard to fraud (given recent confusion)
- Consider whether narrative audit reports should be further enhanced to provide a graduated opinion
- Enhance the requirements with respect to reporting on “other information”
In tandem with the above points separate consultations will be, or are being, conducted on a number of ISAs, including ISA 570 on Going Concern, which raised particular concerns in cases such as Carrillion.
There will also be consideration of how to increase the independence of the audit department of firms, whilst still allowing access to the expertise of others outside of audit. This might be specifying that audit partners are remunerated based only on audit profitability and not, potentially higher margin, non-audit work.
International Ethics Standard Board for Accountants (IESBA)
On a more minor level there will also be revisions to the FRC ES to take account of the changes made to the IESBA Code which take effect from 15 June 2019, though these are expected to be minor.
Brexit will also result in some changes that may have to be made with immediate effect in the event of a no-deal exit from the EU. The legal changes which will take effect from 11pm on 29 March 2019 in the event of a no-deal exit will mean that certain requirements in the auditing or ethical standards will be incorrect. Firms will, instead, have to refer to the new requirements, which have been set out in an appendix to the position paper.
These changes primarily effect those undertaking PIE audits. However, there are other changes which will have more wide-reaching effects, relating to the structure of audit firms, audit exemptions and accounting requirements. A 21 February 2019 letter to audit firms from BEIS and the FRC sets out key issues which need to be addressed. It includes links to the full technical notices on audit and accounting as well as others relating to business structures and provision of services, which explain the wider issues. It will be necessary to plan for the changes in advance as in the event of a no-deal the changes will take immediate effect.
As you can see, this storm of developments and consultations will mean some immediate work to plan for Brexit issues and then preparation for further changes to ISAs and Ethical standards. The latter will have an effective date of 15 December 2019, but in advance of that you may wish to respond to consultations and consider your plan for changes to procedures and training requirements. As usual Mercia incorporating SWAT will be ready to help, with technical manuals, training and support.