The FRC has published an update to its Ethical Standard for auditors, effective from 15 December 2024.

The FRC’s update does three main things: First, the FRC has simplified the existing ethical standard and provided additional clarity in a limited number of areas to respond to helpful feedback from auditors.

 
  • Second, the new standard takes into account recent revisions made to the international IESBA Code of Ethics. This aligns the UK with international standards and helps to ensure high standards of independence and ethical behaviour are applied consistently by UK audit firms and their networks.
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  • Third, the FRC has added a new targeted restriction on fees from entities related by a single controlling party. This is in response to issues identified through FRC audit inspection and enforcement cases.

    • In line with the FRC’s growth duty, the FRC is mindful that high standards of governance, audit and financial reporting underpins confidence in financial markets and contributes to the UK’s ability to attract global capital. High quality ethical standards for auditors enhance trust in the quality of financial information that drives investment in the UK. This is balanced with ensuring that any requirements are targeted and proportionate.   

    Following feedback to the FRC’s earlier consultation, we have amended our proposals to ensure that the requirements in the standard are better targeted and proportionate. For example, additional requirements in respect of ethical breach reporting by audit firms to the regulator have been removed as it would be likely to drive inconsistent reporting behaviours. With regard to tax services provided to the controlling shareholders of unlisted companies the FRC is enhancing the independence risk assessment around these services rather than specifically prohibiting them. 

    The FRC notes that a significant number of consultation responses referred to issues that are matters of government policy rather than decisions that can be taken by the FRC. These include the impact of the non-audit service fee cap for auditors of Public Interest Entities and how it might impact on assurance, including sustainability and climate information produced by companies. The FRC will share this feedback with the Department for Business and Trade. Alongside the revised Ethical Standard, the FRC has also released guidance for auditors on the application of the Objective, Reasonable and Informed Third Party test, which forms a key part of many requirements in the Ethical Standard.

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    FRC executive director of regulatory standards, Mark Babington, said: “The revised ethical standard has been simplified to ensure auditors are clear as to the high ethical standards expected, while the limited number of new requirements are proportionate and balanced to support trust and confidence in UK corporate reporting and audit and in doing so helping to support UK growth and competitiveness.”