Audit Regulations consultation: notification of movement of audits

ICAEW is consulting for transparency and to ensure that the proposed changes are consistent with ICAEW’s duty to act in the public interest. Consulting also helps protect against any unforeseen or unintended consequences that may be brought about by the changes.

This consultation is likely to be of interest to ICAEW members, ICAEW member and regulated firms, non-members who are registered with ICAEW for statutory audit, consumer groups and other professional services regulators.

This consultation ran from 6 June to 6 September 2024 and is now closed.

Background

The transparency of who audits companies in the UK has been the subject of government attention in recent years. Government had intended to introduce a requirement for a notification to be made to Companies House when an auditor was appointed to a company. However, this provision was omitted from the Economic Crime and Corporate Transparency Act 2023. It is unclear when further progress will be made to introduce up to date auditor data at Companies House.

Proposed changes

ICAEW, in its role as a statutory audit regulator, has concluded that greater visibility of the movement of certain audits between audit registered firms would enable more effective regulatory activity to ensure high audit quality. In the absence of the expected Companies House changes, we propose to make some amendments to the UK Audit Regulations. 

We propose to introduce a requirement for audit registered firms to notify ICAEW within 21 business days of being appointed as auditors for certain entities.

The reporting requirement would also apply where a registered audit firm continued as auditor, but the entity began to meet the criteria where they did not previously.

A waiver mechanism is also being considered to ensure that these new requirements are designed in a proportionate way, without creating an undue reporting burden on audit registered firms. 

There is already an obligation for audit registered firms to notify the Financial Reporting Council and the ICAEW Audit Registration Committee within 21 business days when they are appointed as auditor to a retained audit. This obligation remains unchanged. 

Criteria for notification to ICAEW

We propose that an audit registered firm should notify ICAEW when a firm is appointed as auditor of an entity that meets one or more of the following criteria:

Criteria a)

A listed non-retained audit*;

Criteria b)**

A non-retained audit* that:

1. has turnover greater than £750 million or
2. is an Other Entity of Public Interest under the FRC Ethical Standard;

Criteria c)***

Expected first-year audit fee for an entity, group or collection of entities with the same beneficial owner or controlling party that is:

More than two times the firm’s existing highest audit fee as notified on the firm’s last annual return for an entity, group or collection of entities with the same beneficial owner or controlling party

Criteria d)****

The registered auditor has three or fewer responsible individuals and the audited entity or group, or a collection of audited entities under common beneficial ownership or controlling party, have combined turnover greater than £750 million.

• * A non-retained audit is:
• not a PIE audit
• not one that has otherwise been retained by the FRC (for example a Lloyds Syndicate or certain AIM listed entities). 

** The threshold of £750m of turnover aligns with the previously proposed new criteria for a company that would be treated as a PIE under the potential changes to the PIE definition outlined above, although without the additional 750 employee threshold. It may be that the Other Entity of Public Interest (OEPI) category would be removed from the Ethical Standard if a revised PIE definition is introduced. Given the uncertainty of the actions of a future government, it is unknown if and when the FRC would receive notifications of audit appointments to these categories of entity.

*** The rationale for the requirement in (c) applying to an entity, group or collection of entities with the same beneficial owner or controlling party, is to align with recent changes made to the FRC Ethical Standard.

****The rationale for the requirement in (d) applying to an entity, group or collection of entities with the same beneficial owner or controlling party, is to align with recent changes made to the FRC Ethical Standard. The firm threshold in (d) of three or fewer responsible individuals is the level at which a registered auditor is not required to have an ethics partner.

Further guidance relating to all four criteria

The notification would also be required where the auditor remained in post when the audited entity began to meet the criteria in (a) or (b), or the firm and audited entity(ies) began to meet the combined criteria in (d). This is currently the case for the Audit Registration Committee (ARC) reporting requirement under regulation 3.15 of the Audit Regulations. For example where firms have to notify the ARC if they remain in post when the audited entity becomes a PIE.

Waiver mechanism

ICAEW is keen to ensure that a new requirement to notify ICAEW of certain audit appointments is designed in a proportionate way that provides real-time information without creating an undue reporting burden on audit registered firms. 

For this reason, ICAEW is considering whether a waiver mechanism should be available as part of the proposals. The mechanism would make it possible for ICAEW’s Audit Registration Committee (ARC) to issue a waiver to an audit registered firm if the ARC was satisfied that the firm had substantial experience in performing the types of audits that are notifiable.

The waiver mechanism could consist of a complete waiver from the requirement to notify, or periodic reporting of any appointments meeting the criteria.

The changes to the Audit Regulations

You can view the exact changes that are being proposed via the full consultation document.

• Download the full consultation document

Diversity, equality and inclusion

We do not believe the proposed changes will result in a worse outcome or quality of service for anyone due to their background or life circumstances. Please tell us if you think your firm or any of your clients will be adversely impacted by the proposals due to a protected characteristic (such as age, disability or race).

Next steps

The consultation closed on 6 September 2024. We are currently reviewing the comments and feedback received in order to make a recommendation to the ICAEW Regulatory Board on next steps. We expect this recommendation to go before the board early in 2025 and we will then communicate the consultation results and what the next steps will be in early 2025.

Further information

About the UK Joint Audit Regulations

ICAEW together with the Institute of Chartered Accountants Ireland (CAI) and the Institute of Chartered Accountants Scotland (ICAS) are recognised supervisory bodies for the regulation of audit, and jointly have a set of Audit Regulations which are approved by the Financial Reporting Council.