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Time for more ethical auditors?

16 July 2019

Enhancing the ethics partner’s authority and providing a simple list of permitted services, are just two important changes being proposed to the UK’s ethical and auditing standards by the Financial Reporting Council. The UK’s accountancy watchdog explained it is pushing for more stringent ethical rules for auditors, in direct response to the findings of recent inspections and enforcement cases.
The FRC is also proposing to enhance the quality and content of auditor’s reports in order to improve transparency about what is found in the course of an audit.
Key proposed changes include:
• A clear and stronger ‘objective, reasonable and informed third party test’. This requires audit firms to consider whether a proposed action would affect their independence from the perspective of public interest stakeholders rather than another auditor! This is supported by additional material to encourage a wide-ranging assessment, which considers both the spirit and the letter of the standard.
• Enhancing the authority of the Ethics Partner function within audit firms, in order to ensure firm wide focus on ethical matters and the public interest, and to require 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 Public Interest Entities (PIEs) can provide to audited bodies has been replaced with a much shorter list of permitted services, all of which are closely related to an audit or required by law and/or regulation, NO other services can be provided.
• The requirement for the auditors of all UK listed entities to include in their published auditor’s reports the performance materiality threshold used in the audit.
The FRC said it recognises that there are a number of concurrent reviews of the UK audit market taking place (Sir Donald Brydon’s being the main one) and that these proposals are not intended to pre-empt any outcomes.
FRC’s CEO Stephen Haddrill said: “Recent corporate failures and the FRC’s own enforcement work has shown that standards need to be strengthened. Our audit inspections and enforcement activity continue to identify a lack of professional scepticism and independence as being key points of failure when things go wrong. “
* Consultation on these proposals closes on 27 September at 5pm.

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