FRC publishes Revised Ethical Standard 2024
Ann Buttery CA, Head of Ethics, ICAS Policy Leadership, provides a summary of the main changes in the FRC’s Revised Ethical Standard 2024.
Auditors undertaking an audit in the UK, and professional accountants undertaking other public interest assurance engagements in compliance with the engagement standards issued by the Financial Reporting Council (FRC), are required to comply with the requirements of the FRC’s Ethical Standard.
In January 2024, the FRC published its Revised Ethical Standard 2024, which becomes effective from 15 December 2024. Along with the Revised Ethical Standard 2024, the FRC also published guidance on the objective, reasonable and informed third party test.
The main changes from the FRC’s extant 2019 Ethical Standard are highlighted below:
Part B: Section 1 – General requirements and guidance compliance: Breaches
The ‘breaches’ provisions in extant paragraphs 1.21 and 1.22 are now included in paragraphs 1.21 to 1.25. New provisions highlight the following:
- Firm monitoring arrangements are to be designed with the objective to effectively capture all relevant breaches of the ethical standard which are identified by the firm.
- Whenever a possible or actual breach is identified, in making the judgement as to the action to be taken the Ethics Partner and engagement partner are to consider the perspective of an objective, reasonable and informed third party.
- The firm is to report to the Competent Authority about individual breaches outside of the biannual timetable where the Competent Authority would reasonably expect notice. This may be due to the nature or seriousness of the breach. For example, where the firm may need to consider resigning from an engagement.
- Whether a breach is inadvertent is a matter of professional judgement based on an objective assessment of the evidence.
Part B: Section 2 – Financial, business, employment and personal relationships
Financial relationships
The provisions in relation to personal financial independence in paragraphs 2.3 and 2.4 have been re-worded for clarification. This is not intended to create new requirements.
Financial interests held as trustee
An addition to paragraph 2.16 in relation to financial interests held as trustee states that a trustee interest is not to be held, in the case of a firm, where a covered person, a person closely associated with them, or a network firm is an identified potential beneficiary of the trust.
Part B: Section 3 - Long association with engagements and with entities relevant to engagements
A new table has been added at the end of this section at paragraph 3.22 to summarise the rotation periods for audit partners, engagement quality reviewers, and other senior staff. Plus, a new paragraph 3.23 has been added which draws on guidance from the FRC Technical Advisory Group’s (TAG’s) “Rolling record of actions arising” when there are significant gaps of service.
Part B: Section 4 - Fees, remuneration and evaluation policies, gifts and hospitality, litigation
In paragraphs 4.21, 4.22, 4.25, 4.27 and 4.29 (extant paragraphs 4.23, 4.24, 4.27, 4.29 and 4.31) there is a new restriction on fees from entities related by a single controlling party. This is an important new restriction and widens the applicability of the fees requirements.
Part B: Section 5 - Non-audit/additional services - Section A - General approach to non-audit/additional services
Documentation
Paragraph 5.32 states that the engagement partner must ensure that the reasoning for a decision to provide non-audit/or additional services is appropriately documented. Paragraph 5.33 has been re-worded to better highlight what the FRC expects practitioners to document:
“5.33 Matters to be documented include:
- threats identified;
- safeguards adopted and why they are considered to be effective in responding to the specific threats identified;
- any significant judgements concerning the potential threats and proposed safeguards; and
- where relevant, how the Objective and Reasonable Third Party Test was applied;
- communication with those charged with governance.”
Part B: Section 5 – Non-audit/additional services - Section B - Approach to non-audit/additional services provided to public interest entities
The ‘Reporting on the iXBRL tagging of financial statements in accordance with the European Single Electronic Format for annual financial reports’ has been moved from the list of ‘Services required by law or regulation and exempt from the non-audit services cap’ to being included under the list of ‘Services subject to the non-audit services cap’. The revised Ethical Standard 2024 adds that: ‘In situations involving a dual listed entity where iXBRL tagging assurance is required by the laws and regulations of another jurisdiction, then the part of the fee relating to such another jurisdiction is not subject to the fee cap.’
Part B: Section 5 – Non-audit/additional services - Section C - Approach to Non-audit/additional services provided in any statutory audit engagement
Internal audit services
A new paragraph 5.46 provides clarity of the internal audit services definition.
Information technology services
New paragraphs 5.53 and 5.54 have been added in order to reflect the International Ethics Standards Board for Accountant’s (IESBA’s) ‘Technology-related revisions to the Code’ which will become effective 15 December 2024.
“5.53 Examples of services provided to an entity relevant to an engagement which create threats to the integrity, objectivity and independence of the firm and covered persons include:
Storing or managing the hosting of data on behalf of an entity relevant to an engagement. Such services include:
- Acting as the only access to financial or non-financial information system of such an entity.
- Taking custody of or storing the entity’s data or records such that the entity’s data or records are otherwise incomplete.
- Providing electronic security or back-up services, such as business continuity or disaster recovery functions, for the entity’s data or records.
- Operating, maintaining, or monitoring such an entity’s IT systems, network or website.
5.54 The collection, receipt, transmission and retention of data provided by an audited entity in the course of an audit or to enable the provision of a permissible service to that entity do not create the threats described in paragraph 5.53.”
Tax services
The FRC has added (d) to paragraph 5.67 (extant paragraph 5.64) in relation to the range of activities covered by the term ‘tax services’:
“5.67 The range of activities encompassed by the term ‘tax services’ is wide. They include where the firm:
(a) Provides advice to the entity on one or more specific matters at the request of the entity.
(b) Or undertakes a substantial proportion of the tax planning or compliance work for the entity.
(c) Or promotes tax structures or products to the entity, the effectiveness of which is likely to be influenced by the manner in which they are accounted for in the financial statements, or in other subject matter information.
(d) Performs any of the services described in paragraphs a-c to individuals who are the controlling shareholders of an entity relevant to an engagement. Firms need to identify threats to independence from the provision of such services, including familiarity threats, and any relevant safeguards that can be applied.”
Paragraph 5.74 has been included to be in line with the provisions in the IESBA Code highlighting that the preparation of tax calculations of current and deferred tax liabilities (or assets) for an audited entity for the purpose of preparing accounting entries that support such balances creates a self-review threat.
Paragraph 5.80 has also been added which incorporates FRC Technical Advisory Group guidance to the prohibition in paragraph 5.79 on providing tax services where this would involve acting as an advocate for the entity in the resolution of an issue.
Legal services
Paragraph 5.87 (extant paragraph 5.83) has been amended to bring the provision in line with the prohibition in the IESBA Code stating that “the firm shall not provide legal services to an entity relevant to an engagement, where this would involve acting as the General Counsel of that entity, or a solicitor formally nominated to represent the entity in the resolution of a dispute or litigation.”
Recruitment and remuneration services
Paragraph 5.89 (extant paragraph 5.85) has been changed to be more in line with the provisions in the IESBA Code by extending the prohibition on recruitment services as set out in this paragraph to network firms and adding bullets noting services which could be considered ‘recruitment services’.
Corporate finance services
The FRC has amended paragraph 5.97 (extant paragraph 5.93) to be more in line with the provisions in the IESBA Code by extending the prohibition on corporate finance services being provided when the service would involve the firm taking responsibility for dealing in, underwriting, or promoting shares, debt and other financial instruments, or providing advice on investments in such shares, debt or other financial instruments.
Other entity of public interest (OEPI)
The FRC’s consultation sought views on whether to withdraw the category of ‘OEPIs’. Entities which fall within this category are subject to enhanced restrictions on the types of non-audit services which their auditors can provide. In its Feedback Statement and Impact Assessment, the FRC noted the following:
“The FRC does not have the statutory powers to revise the definition of a UK Public Interest Entity (PIE). That is a decision for government. However, the FRC does have the power to amend or withdraw the OEPI category, and given the unanimous nature of this consultation feedback it is highly likely that we will do so once details of any new statutory definition are known. We believe this will be an effective de-regulatory action, reducing complexity and helping the competitiveness of the UK economy. The FRC entirely agrees with the objective to have a simple and straightforward definition of a UK PIE, including one that is as closely aligned as possible to the IESBA Code.”
The 70% non-audit services fee cap for PIE auditors
In our response to the FRC’s consultation we noted that, with regard to the provision of assurance on sustainability-related matters to PIEs being exempted from the 70% cap, in order to ensure a level playing field with other potential assurance providers, we believe that where such a service is provided by an entity’s financial statement auditor, the fee concerned should not form part of the non-audit services cap calculation.
In its Feedback Statement and Impact Assessment, the FRC noted that while the FRC has no powers to amend the 70% non-audit services fee cap for PIE auditors, they acknowledge the large volume of feedback received, which they will share with the Department for Business and Trade.
Further information
For further information, the FRC’s news article about the publication of the Revised Ethical Standard 2024 is available here.
