FRC Issue an Update to the Ethical Standard

On 15 January 2024, the Financial Reporting Council (FRC) issued an updated Ethical Standard. The changes come into effect on 15 December 2024.

The Ethical Standard (ES) sets fundamental principles, supporting ethical provisions, and general requirements for the conduct of audits and other public interest assurance engagements, and the changes follow on from a consultation draft published in August 2023.

There are three main things that the changes are aiming to achieve:

1. Simplify and clarify the ES to be more concise.
2. Align the ES to that issued by the International Ethics Standards Board for Accountants.
3. Place a restriction on fees from entities controlled by a "single controlling party".

What proposals did not make it to the updates ES?

In the consultation draft the FRC proposed to amend or withdraw the Other Entity of Public Interest (OEPI) category, but this can only be done once a final statutory definition becomes effective.

There was also some concern because the proposals required any breaches to be treated as "not inadvertent" (i.e. deliberate). Thankfully however this was dropped.

The big change

The revised ES tightens the fee threshold by bringing in the concept of a group. Where fees are from a collection of entities which have the same beneficial owner or controlling party, this will now also contribute towards the 10% limit. Firms will need to be extremely careful here, particularly where they act for a very large group.

There are new requirements that firms report all breaches to the Competent Authority on a biannual basis and to those charged with governance in a timely manner where it relates to a specific engagement. It is also now required that engagement partners consider the perspective of an objective, reasonable and informed third-party (ORITP) to test whether it is necessary to resign from an engagement or, what safeguards should be put in place. The revised ES offers guidance and examples on this.

In addition the rules on members of the firm with a financial interest in an audit are strengthened. As well as disposing of the financial interest (or part of it) and not being involved in the audit engagement, the individual must be excluded from any role where they operate in the same office or business unit as the audit engagement partner.

Steve Collings is an author for accountingcpd. To see his courses, click here.