FRC’s Ethical Standard: The FRC’s Revisions

By James Barbour, Director, Technical Policy

3 May 2016

James Barbour, Director, Technical Policy highlights the revisions to the FRC’s Ethical Standard.

The Finance Reporting Council’s (FRC) Ethical Standard (ES) replaces:

  • The existing FRC Ethical Standards for Auditors 1 – 5;
  • The FRC’s Provisions Available for Smaller Entities (PASE); and
  • The FRC’s Ethical Standard for Reporting Accountants (ESRA).

The FRC has sought to accommodate the feedback it received to the draft ES included in its September 2015 exposure draft. This has included seeking to make the standard clearer, less complex and easier to use.

Effective Date

  • The FRC’s ethical standard takes effect on 17 June 2016.
  • Firms may complete engagements relating to periods ending before this date in accordance with the FRC’s existing ethical standards, putting in place any necessary changes in the subsequent engagement period.
  • Certain transitional relief is also available for engagements to provide tax services wholly or partly on a contingent fee basis to a listed entity relevant to an engagement that is not an SME listed entity or a significant affiliate of such an entity (Paragraph 1.80 of FRC ES).

Technical Advisory Group

  • The FRC has established a separate technical advisory group to identify those areas where separate additional guidance may be necessary.


  • The FRC’s ethical standard will apply to all audit engagements, and other public interest assurance engagements where those are carried out using performance standards issued by the FRC. At present this will include:
  • Standards for Investment Reporting (SIRs);
  • The Standard for Reviews of Interim Financial Information Performed by the Independent Auditor of the Entity (ISRE (UK and Ireland) 2410); and
  • The Client Assets (CASS) Standard.

Applicability of Existing More Stringent Requirements

  • The FRC will apply its existing more stringent requirements to all PIEs as defined by the EU Audit Legislation. Whilst for certain entities this could be viewed as “gold plating” investors support this approach.
  • In respect of non-listed PIEs, which find themselves subject to the requirements of the Regulation for the first time, the FRC has incorporated guidance (paragraph 3.14 of the ES) into the standard to address concerns about the impact caused by partner rotation requirements. This explains those circumstances where an audit committee might be requested to approve the extension of the appointment of an engagement partner or key audit partner from 5 years up to a period not exceeding 7 years.
  • Consideration is being given as to whether additional guidance will be required for the Lloyds market given the unique circumstances that apply.

Provisions Available for Smaller Entities

  • The FRC has decided to simplify and retain the ES-PASE but to include this as a separate section within the body of the Ethical Standard (Section 6). With the increased audit exemption thresholds applicable for accounting periods commencing on or after 1 January 2016 in due course more entities will be eligible to utilise the provisions in the ES-PASE.

Group Audits – Extraterritoriality

  • The FRC has amended its earlier proposal. The FRC will now require the use of its Ethical Standard, where the audited entity the auditor will report on is a PIE. In contrast, for all other entities the International Ethics Standards Board for Accountants (IESBA) Code should be applied (as per current requirement).

Cap on Non-Audit Services

  • The FRC has clarified that when applying the 70% fee cap for non-audit services to an audit firm’s network, the requirement applies to the audited entity, its controlled undertakings and the consolidated accounts of that group. However, it does not apply to the parent undertaking of the entity.

Replacement of ‘Chain of Command’ definition

  • The FRC has decided to proceed with its proposal to replace this definition with that of a ‘person in a position to influence the conduct or outcome of an engagement’.
  • The definition has been revised from that which appeared in its exposure draft. The FRC has sought to clarify that those who can influence the appraisal or remuneration of any member of the audit team ‘management’ should only be in respect of those who have a direct influence in that process, rather than being able to ‘otherwise influence’ it.

Accepting an Engagement for an Entity Employing a Former Partner or Other Restricted Person

  • The FRC has made some clarifications to its original proposed text and sought to ensure that these requirements are consistent with those requirements applicable when a partner or responsible individual leaves an audit firm to join a client.

Mitigation of Risk of an Auditor’s Independence being compromised by clarifying requirements relating to the provision of non-audit services provided before taking up appointment as auditor

  • The FRC has sought to clarify and simplify the language of this particular provision where possible.
  • It has acknowledged that a threat to independence can reduce with the passage of time or because the entity has been subject to audit by another auditor. This is in response to stakeholder feedback, as a means of ensuring that the standard is applied proportionately to address the risk faced.

Prohibitions over Providing Advocacy for an Audited Entity in relation to Tax

  • The FRC has revised the proposed text (paragraphs 5.99-5.101) to clarify that the prohibition does not apply to advice provided to an audit client that does not constitute advocacy, and clarified the definitions in the text of the standard.
  • An explicit link has also been made between the requirement and the risk that is identified in the ethical provisions. Emphasis has also been placed on the materiality consideration, which was already in the draft standard, which permits the provision of a service where it is not material in the context of the engagement. The FRC highlights that this is consistent to the approach adopted in relation to the application of the derogation under the EU Audit Legislation in respect of non-audit services where the effect of those services is clearly inconsequential in the context of the engagement.

Prohibition of Tax Services on a Contingent Fee Basis

  • The FRC has revised the draft standard to acknowledge the need for smaller entities to be able to access appropriate support, and for the FRC’s standards to proportionately address risk.
  • The standard now includes a materiality consideration for listed entities below the 200m euros MiFID SME capitalisation threshold, whereby the prohibition will not be applicable in situations where a contingent fee for tax services is not material in the context of the audit firm, or the remuneration or profit share of the partner or partners involved in the engagement.
  • The absolute prohibition remains in respect of larger listed entities over the 200m euros threshold.

Targeted Reliefs for Audits of Smaller Listed/Smaller Quoted Entities

  • The FRC has decided to retain its proposal to offer certain reliefs in this respect. It has, however, following discussions with the London Stock Exchange, decided to set the threshold at 200m euros as opposed to its initial proposed threshold of £100m.
  • Using the MiFID threshold means that the Standard can refer to an existing, and well recognised definition, and that the applicability of the threshold is calculated and monitored under the MiFID framework on a three year rolling basis.

Personal Financial Independence Requirements

  • The FRC has retained its existing requirements prohibiting the holding of immaterial direct financial interests in an audit client, and the wider application beyond those personnel involved directly in statutory audit through paragraph 2.3 of the Standard.


  • Corporate and financial reporting
  • Ethics and integrity research

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