The UK Financial Reporting Council (FRC) issued new ethics rules, and an independent report recommended numerous actions that can be taken to improve the quality of audits.
The FRC’s ethics-related changes strengthened auditor independence requirements, banned auditors from providing recruitment and remuneration services, and included provisions to prevent conflicts of interest. Meanwhile, the user-focused report issued by Sir Donald Brydon focused on ways to make audits better.
In a major revision to its ethical standard and revised auditing standards, the FRC incorporated changes to international ethical requirements, which now prohibit auditors from providing recruitment and remuneration services or playing any part in management decision-making.
Under the revised guidance, public-interest entity auditors will only be able to provide nonaudit services that are closely linked to the audit itself or required by law or regulation. This change is designed to reduce the risk of conflict of interest.
The revisions build on changes made to standards in 2016.
“The steps we have taken in revising our standards include measures which our stakeholders have identified as important to strengthen their confidence in audit, by ensuring greater independence and a focus on delivering high quality and consistent work,” the FRC’s chief executive, Sir Jon Thompson, said in a news release.
Brydon makes recommendations
The Brydon Report was commissioned as the UK government aims to improve governance and reduce the risk of corporate scandals. Performed by the departing chair of the London Stock Exchange Group, the report contains recommendations about the work undertaken by auditors as well as the roles auditors play in the audit.
The objective of the report is to make audits more informative to users, adding value to the economy as a whole by improving the cost and allocation of capital. The report suggested that audit quality could be improved through the following actions:
- A redefinition of the audit and its purpose.
- The creation of a corporate auditing profession governed by principles.
- The introduction of suspicion into the qualities of auditing.
- The extension of the concept of auditing to areas beyond financial statements.
- Mechanisms to encourage greater engagement of shareholders with audit and auditors.
- A change to the language of the opinion given by auditors.
- The introduction of a corporate audit and assurance policy, a resilience statement, and a public interest statement.
- Suggestions to inform the work of the UK’s Business, Energy & Industrial Strategy Committee on internal controls and improve clarity on capital maintenance.
- Greater clarity around the role of the audit committee.
- A package of measures around fraud detection and prevention.
- Improved auditor communication and transparency.
- Obligations to acknowledge external signals of concern.
- Extension of audit to new areas, including alternative performance measures.
- The increased use of technology.
“Together, these recommendations, proposals, and suggestions provide my prescription for improving the quality and effectiveness of the audit,” Brydon said in the report.
The FRC will study the report with interest, an FRC spokesman said.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is FM magazine’s editorial director.