The Accounting Practices Board has published a revised version of Ethical Standard 3: Long association with the audit engagement, following a consultation earlier this year.
APB Ethical Standards apply in the audit of financial statements. Prior to the revision, ES 3 provided that the lead audit partner responsible for auditing the accounts of listed companies (known as the audit engagement partner) was required to rotate every five years. Although this standard was said to be necessary to ensure the objectivity and independence of the audit, international standards specified a rotation period of seven years.
ES 3 now permits an extension to the rotation period of the audit engagement partner from five to seven years where the audit committee of the listed company decides that a degree of flexibility over the timing of rotation is necessary to safeguard the quality of the audit. An audit committee may consider that such flexibility safeguards the quality of the audit where e.g. substantial change has recently been made, or will soon be made, to the nature and structure of the audited company’s business, or there are unexpected changes in the senior management of the audited company.
In addition, the audit committee’s decision to extend the rotation period must be clearly disclosed to the audited company’s shareholders “as early as practicable” and in each subsequent year of the extended period, together with the reasons for the decision. If the company does not make the disclosure then the audit engagement partner will not be permitted to continue in his role for the extended period.
The revisions in ES 3 take effect for audits of financial statements for periods commencing on or after 15 December 2009, although earlier adoption of the revisions is permitted.
The revised version of ES 3 can be found at http://www.frc.org.uk/images/uploaded/documents/Ethical%20Standard%203%20(revised)%20October%2020091.pdf.
A feedback statement on responses received to the March 2009 consultation can be found at http://www.frc.org.uk/images/uploaded/documents/Feedback%20on%20Responses%20to%20cons%20on%20ES%20for%20auditors%20-%20final.pdf.
