The Revised Ethical Standard 2016 for auditors replaces Ethical Standards 1 to 5 and brings all the ethical standard provisions available for audits of small entities into one document.
This was a consolidation exercise but did result in changes that need to be reflected within firms’ procedures.
Main changes from the previous ethical standards
Some changes on contingent fees. (Paragraphs 4.6R and 4.7R contain the changes and paragraphs 4.6R to 4.26 relate to contingent fees.) This affects all audits.
Some minor changes on advocacy services relating to certain tax services which were contained in Ethical Standard 5 paragraphs 104 to 108 (paragraphs 5.97 to 5.102). This affects all audits. Some other changes relating to advocacy services to public interest entities are contained in paragraphs 5.167R and 5.168R (see point 4 below).
New requirement for fees for non-audit services provided to the audited entity and its subsidiaries to be limited to no more than 70% of the fees charged (paragraphs 4.34R to 4.36R). The Standard states that 'the cap is based on average audit fees for the three consecutive financial periods commencing on or after 17 June 2016. Following the appointment of a new auditor after that date the cap will apply from the fourth financial period of that engagement.' This only affects public interest entities. Public interesteEntities are defined in Article 2 point 13 of Directive 2014/56/EU. Further information about public interest companies within Europe together with the definition can be found in this document The AIM market in the UK is not an EU regulated market so a company listed on AIM will continue to be treated as a non-public interest entity listed entity. This will mean that the enhanced public interest entity requirements will generally not apply to AIM companies. The Regulation allows the Financial Reporting Council (in the UK) on request to grant an exemption from this fee cap for a short period of time. The Financial Reporting Council has published guidance on how to apply for this exemption.
The Ethical Standard includes a list of prohibited non-audit services. These are services which an audit firm carrying out the statutory audit of a public interest entity shall not provide to the audited entity. This covers the audit firm and any member of its network of firms together with the audited entity and the group it belongs to (paragraphs 5.167R to 5.173R). This only affects public interest entities.
The requirements for audit firm rotation are set out in the Companies Act 2006 sections 487 to 491 as amended. Statutory Instrument 2016 number 649 introduced many changes to the audit requirements including audit firm rotation. These changes took effect from 17 June 2016 with transitional provisions. The Ethical Standard states that ‘the firm shall ensure that it does not accept or continue an audit engagement that would cause those requirements to not be complied with’ (paragraph 3.9).
Key audit partners responsible for carrying out a statutory audit of a public interest entity shall cease to act within five years of their appointment and shall not participate again before at least another five years (paragraph 3.10R). This only affects public interest entities.
Audit firm rotation The EU Audit Directive (2014/56/EU) and Audit Regulation (537/2014) are measures to strengthen the audit regime. The Directive (2014/56/EU) applies to all audits required by EU law and the Regulation (537/2014) applies to all public interest entities. Statutory Instrument 2016 number 649 entitled 'The Statutory Auditors and Third Country Auditors Regulations 2016’ has been introduced in the UK which amends the Companies Act 2006 with effect from 17 June 2016.
Amongst other changes this Statutory Instrument amends sections 487 to 491 and requires public interest companies to put their audit out to tender at least every 10 years and change their auditors at least every 20 years.
The sections introduced into the Companies Act 2006 by SI 2016/649 include the following:
487A Maximum engagement period transitional arrangements
489A Appointment of auditors of public company additional requirements for public interest entities with audit committees
489B Appointment of auditors of public company additional requirements for public interest entities without audit committees
491A Maximum engagement period transitional arrangements.
The statutory instrument defines ‘public interest entities’ but in summary these are entities with debt or equity traded on an EEA regulated market, banks, building societies and insurance undertakings.