Audit eligibility changes: check your firm will meet new requirements

The Audit Regulations need to be aligned with the requirements in the FRC’s Eligibility Criteria and the Companies Act 2006. The requirements in the Audit Regulations were looser than the Eligibility Criteria and the Act, and having taken external advice, we needed to update the Audit Regulations.

The amendments could affect all firms (other than sole traders). We therefore encourage you to review the changes as soon as possible and to take all necessary steps to ensure your firm will continue to be eligible for audit registration after 1 April 2025.

The key changes are:

• The definition of ‘voting rights’ has changed. The term applies to the rights to vote on all matters that direct the overall policy of the firm, or that alter its constitution.
• A new definition of ‘majority’ has been introduced. This means more than 50% is required for decision-making, unless a firm’s constitution specifies a higher percentage, then ‘majority’ shall mean that specified percentage or more.
• The guidance under Audit Regulations 2.03b and 2.03c has been aligned to these new definitions.
• Access the UK Audit Regulations and Guidance effective 1 October 2024

The effect of these changes will require that all matters affecting the overall direction of a firm’s policy, or that alter its constitution, must be capable of being approved by qualified persons. In particular, if matters have approval percentages that are higher than a simple majority, those decisions at higher percentages must be capable of being made by qualified persons.

Firms will therefore need to ensure that enough voting rights are held by qualified persons to meet any approval percentages stipulated in the firms’ governance documents. It is not enough that qualified persons can veto a decision; the qualified persons must be capable of passing the vote on all matters that direct the firm’s overall policy or alter its constitution.

Qualified persons is defined as individuals who hold an appropriate (audit) qualification, certain third country auditors and audit-registered firms (see paragraph 7(2) of Schedule 10 of the Companies Act).

• Find out more about the reason for the changes

We check firms’ governance documents during monitoring visits and at other relevant times (eg, when a firm notifies us of a significant change of owner or structure of the firm, or in response to answers given on a firm’s ICAEW annual return). If we find a firm has not made the required changes to its governance arrangements by 1 April 2025 then the firm will be ineligible to continue to hold audit registration and will need to be reported to the Audit Registration Committee for the cessation of its registration.

The changes came into effect on 1 October 2024; firms will have until 1 April 2025 to comply. This will allow firms time to make any necessary changes to their governance documents and arrangements in order to ensure the requirements of the Audit Regulations, Eligibility Criteria and the Act are met from 1 April 2025.

We have set out the steps your firm should take now to prepare for 1 April 2025.

• Find out more

The FRC has issued a position statement concerning the interpretation and application of paragraphs 6(b) and (c) of the Eligibility Criteria and related provisions of the Act. Firms may find this useful to review when considering if their existing governance arrangements will need to be amended in order to comply with the updated Audit Regulations.

Other useful information:

• FRC Eligibility Criteria
• Audit Regulations and Guidance
• FAQs and further help