FRC consults on revisions to ethical standards: Enhancing integrity, objectivity and independence
The Financial Reporting Council (FRC) has issued a consultation on revisions to its Ethical Standard. The proposed changes demonstrate the FRC’s continued focus on ensuring that the principles of integrity, objectivity and independence remain embedded in the audit industry. Along with amendments to align with international standards, the revisions seek to address issues identified in previous audit inspection and enforcement cases and promote the timely reporting of breaches.
The proposed revisions span the following key objectives:
- Enhancing prohibitions: the FRC proposes to update the Ethical Standard to include enhanced prohibitions aimed at addressing potential threats to an audit firm's independence due to economic over-reliance on fees from specific entities that are connected. By strengthening these prohibitions, the FRC aims to further safeguard the objectivity and independence of auditors.
- Aligning with international standards: the FRC proposes to update the Ethical Standard to reflect significant developments in the International Ethics Standards Board for Accountants (IESBA) Code, which was last revised in 2019. This ensures that the UK's Ethical Standard remains at least as stringent as the international code, promoting consistency and high-quality audit practices across borders.
- Timely reporting of breaches: the FRC proposes to update the Ethical Standard to include a requirement to report certain breaches to the relevant Competent Authority in real-time (as opposed to reporting breaches to the regulator on a biannual basis). The proposed language for the new paragraph 1.24 of the Ethical Standard largely reflects the language included in the FRC’s Ethics Breach Reporting Policy of the Auditors of Public Interest Entities (PIEs). However, the decision to enshrine the requirement in the Ethical Standard itself broadens its application beyond PIEs and makes the failure to comply a direct breach of the Ethical Standard.
- Reflecting audit inspection and enforcement findings: a number of the changes proposed by the FRC take into account relevant findings from audit inspections and enforcement cases, with the FRC seeking to ensure the Ethical Standard clearly reflects expected good practice.
The FRC has requested comments on the proposed changes by 31 October 2023.