Emerging audit threats and issues: Fees, fraud and firm names

New and emerging threats and issues continue to affect audit firms. Michael Lavender, Senior Monitoring Reviewer, highlights key areas to watch, including fee dependence under the revised Ethical Standard, falsified audit reports and firm naming requirements – and what firms should do now.

Ethical Standard changes relating to entities under common ownership 

The Revised Ethical Standard 2024 applies to periods beginning after 15 December 2024. This impacts audits of periods ending 31 December 2025, which firms are auditing this year.  

One of the key revisions requires firms to consider a client's wider ownership structure when assessing ethical threats, such as those arising from possible fee dependence. 

Firms must make sure that consideration of potential fee dependence threats covers the total fees received from a client, including fees from its subsidiaries and those from entities with the same beneficial owner or controlling party. This applies whether or not the entities are formally constituted as a group from an accounting perspective.  

That means that: 

• If the total expected fees from a non-listed / non-Public Interest Entity (PIE) client and its subsidiaries, or a collection of entities with the same beneficial owner or controlling party, will regularly exceed 15% of the firm’s annual fee income, the firm must not act as the provider of the engagement for that entity. It must resign or not stand for reappointment. 
• If the total expected fees from a non-listed / non-PIE client and its subsidiaries, or a collection of entities with the same beneficial owner or controlling party, will regularly exceed 10%, but not 15%, of the firm’s annual fee income, the firm must arrange an external independent quality control review before signing off the engagement. 

Lower thresholds apply to PIE clients. There’s also an alternative provision for the audits of small entities, which removes the need for an external independent quality control review where fees are expected to be between 10% and 15% of the firm’s income on a regular basis. 

Firms must identify all relevant entities with the same beneficial owner or controlling party. It’s not uncommon for firms to act for multiple legal entities under common ownership or control.  

A breach of the ethical requirements relating to fee dependence is a serious matter. If identified on a monitoring visit, it’s likely that the visit report will be referred to the Full Authorisation Committee, with regulatory action or a penalty possible. 

Falsified audit reports 

The ICAS Audit Monitoring team has seen an increase in reports of accounts being filed with a falsified audit reports. Firms should stay alert to companies filing accounts that purport to be audited by them that haven’t been.  

Firm and Responsible Individual (RI) names, and sometimes signatures, are publicly available through Companies House. This makes this type of financial reporting fraud relatively easy to carry out. The use of AI-generated financial statements may increase this risk.  

Firms with access to Companies House search services can use them to check for unauthorised firm and RI names to make sure there’s no fraudulent activity taking place. Firms should also stay alert to any signs of inappropriate use of their name(s) by clients and non-clients.  

Firms can also easily search Companies House records using their own address to make sure that there are no unexpected companies registered at their address. 

Report any instance of falsified audit report to Companies House immediately, and where appropriate other fraud reporting obligations may exist. 

Audit firm names 

As set out in the Firm Names Helpsheet, a member or a firm in which they operate may practice under any name or title, subject to the ICAS Regulations and guidance. This includes the use of a ‘trading name’.  

However, there are some key factors for firms to consider. One of these is to make sure the practice name is not misleading. For example, it would be misleading for: 

• A firm with very few offices to describe itself as 'international' merely on the grounds that one of them was overseas. 
• A sole practitioner to add the suffix 'and Associates' to the name of their practice unless formal arrangements were agreed with two or more consultants or firms. 
• There to be a real risk that a firm name could be confused with the name of another firm, even if the member(s) of the practice could make a justifiable claim to the name. 
• A member of a trading group or network to bear the same name as the group or network – though this does not prevent a member or firm practising under its own name 'as a member of (a named accountancy group)' or merging their practice name alongside the group or network name. 

In addition to these standard areas of guidance, audit firms should give extra consideration to the name they wish to use. An audit firm should not have a name which is the same as, or sufficiently similar to, that of a firm already registered on the Public Audit Register.  

A name would be considered to be sufficiently similar in one or more of the following circumstances: 

• It contains two or more identical words, not including “audit”, “services”, “LLP”, UK, Ltd, “partnership”, “and/& Co/Company”, “and” or “the”, e.g. “Fred’s Excellent Audit Services” could be considered to be sufficient similar to “Fred’s Excellent Audit and Assurance Services”. 
• The difference is one of punctuation or the use of a character. 
• Names that are spelled differently but sound the same. 
• The name would, if shortened or abbreviated, be likely to confuse the public. 

A firm can use a similar name if the existing firm, already registered on the Public Audit Register, has no objection. 

These restrictions do not apply to firms within the same group or ownership structure, or firms that are otherwise connected.