Feedback summary
In total there were 78 responses to the consultation with input from large firms, sole practitioners and the Financial Reporting Council. The breadth and insight given by these responses has been informative in concluding on how the regulations should be changed.
In summary:
- Respondents were broadly in support of the changes in relation to CPD to align the Audit Regulations with the revised CPD Regulations that apply from 1 November 2023.
- 72% of respondents agreed that it should be compulsory for sole practice auditors to appoint an alternate to step in should the individual become incapacitated.
- Feedback in relation to sanctioning of RIs was mixed, with a range of concerns raised in relation to the exercise of these powers.
The common themes and our responses to the feedback are below.
Detailed comments on the proposed wording
Continuing professional development
As the changes to the CPD Regulations for ICAEW members from 1 November 2023 were well publicised, the feedback on this aspect in the context of the audit regulations was positive. 94% of those responding said they understood the proposed changes to the audit regulations and their interface with the CPD Regulations.
A third of respondents however indicated there may be some challenges in their implementation. In particular, questions were asked around the proposed retention of records for six years in contrast with the CPD Regulations which require retention for three years.
Some clarification was considered necessary around the obligation of firms to monitor the records of staff who carried out work on audits. Draft Audit Regulation 3.17 indicates that a registered auditor must make arrangement for the retention of records of CPD undertaken “by principals and employees”.
It was considered to be unclear whether it related to
- all staff,
- all principals (rather than just those working in audit) and
- all activities of a firm or just audit.
Finally, questions were asked around the movement of staff and the portability of their CPD records.
Our response
In relation to retention of records, we have concluded that it should be a six year retention period in the Audit Regulations in order for the quality assurance work to be effectively completed under the six- year cycle. This includes enabling ICAEW’s Quality Assurance Department to be able to look back on six years’ records.
To clarify which staff would be in scope of CPD record monitoring, some wording will be added to the Audit Regulations to make clear that the obligation solely relates to those carrying out audit work. This applies irrespective of which Institute the staff or principals are members of. Any ICAEW member firms will also have broader obligations under the revised CPD Regulations in relation to the CPD records of their staff, covering all types of CPD, whether audit related or not.
Where a staff member moves firms, we would expect that in practice the member of staff should be holding their own copy of their CPD record, and recruiting firms would, in the course of due diligence on appointment, check these records.
Other than the additional wording that will be inserted in relation to staff within scope of CPD record monitoring, the changes to the Audit Regulations will be in line with the consultation draft in respect of CPD.
Compulsory alternates
The positive responses to this part of the consultation included:
- 72% of respondents supported in general the proposal for compulsory alternates for sole practitioner auditors; and
- 90% of respondents considered the proposed policy to be clear.
However, concerns were raised by one or more respondents regarding the following aspects:
- Concern was raised about the ability to find alternate RIs who would have the appropriate competence and capacity and who were not conflicted from acting on the sole practitioner’s audits.
- The six month timeframe to find an appoint an alternate may be too short a period to secure the appropriate arrangements.
- Concern was raised that the new proposal would require an RI to have alternate arrangements where there were very few or even no current audit mandates.
- Requests were made by a number of respondents for a template agreement for appointment of an alternate and for checklists of key points to consider.
Our response
As the main concern raised by respondents was the ability of a sole practitioner auditor to find an RI who would be willing to act as an alternate, we have concluded that the class of individuals who could fulfil the role of alternate will be widened to any RI or chartered accountant, not necessarily one who is an RI. This should increase the pool of potential alternates and would still provide continuity of service and protection to the public. It will be clarified in accompanying guidance that the intention of the policy is to secure an outcome for clients and staff for a continuation of service, and that the alternate would not necessarily have to carry out the work themselves but would instead be expected to facilitate a transition, possibly with other firms.
Widening the alternate requirement to any RI or chartered accountant should also mean that at six-month timeframe is more achievable. The implementation date for the revised Audit Regulations requiring a sole practice auditor to appoint an alternate will be early 2025. This will give sole practice auditors until summer 2025 to find and appoint an alternate.
In relation to the concern about needing an alternate when there are very few or no audit mandates, ICAEW has considered the potential for a de minimis level of audit engagements or audit fees below which an alternate would not be required. However, even if there was no formal alternate requirement, some form of letter of wishes, or instructions of who to contact if a practitioner became incapacitated would still need to be in place, and details shared with ICAEW. As such, this would be similar in substance to an alternate arrangement without the associated clarity and detail, which is not considered desirable. A two-tier policy may also be difficult for practitioners to follow and for ICAEW to monitor. For those reasons, we have concluded that a de minimis number of audit appointments is not appropriate.
In terms of a template alternate agreement, ICAEW has previously made template agreements available to members. However, as most alternate arrangements will be bespoke for most practitioners, the creation and subsequent maintenance of a template legal agreement in a form that was useful for members provided unworkable. However, a checklist will be developed building on existing helpsheets for appointing or becoming an alternate, with the addition of any other material thought useful.
The consultation did also ask the question about the merits of extending the alternate requirement for sole practices to all areas of accountancy. Less than a third of respondents (32%) were in favour of this. At this point, ICAEW is not minded to seek to apply the alternate requirement more broadly, but will be emphasising the need for continuity arrangements of some form, by all sole practitioners as required under Accounting Standard 4 – Quality Control – Organisation & Control.
Sanctioning of responsible individuals by the Audit Registration Committee
The rationale for introducing this requirement is that, at present, if the Audit Registration Committee considers that there has been a breach of the Audit Regulations when it reviews a quality assurance monitoring report, it can offer a financial penalty (regulatory penalty) to the audit firm but currently has no powers under the Audit Regulations to offer a financial penalty to the RI. This is because the firm is the audit registrant. However, if the ARC has concerns about the individual conduct of the RI, it can and does refer the RI to the Conduct Department for further investigation and potential disciplinary action. The perceived advantage in introducing a power for the ARC to issue financial penalties against RIs would mean the individual could instead be offered regulatory penalties by the ARC which would speed matters up. However, any matter that was considered serious (and requiring a non-financial sanction instead of or in addition to a financial penalty) would still be reported to the Conduct Department in line with existing processes.
Feedback on these proposals was mixed:
On the positive side, 81% of respondents felt the draft regulations were clear.
On the negative side, the following challenges were made by the firms responding to the consultation (with our response and comments in italics below):
- There is already the ability for the RSBs to impose sanctions and penalties on RIs for poor work so there is no need to amend the Audit Regulations to comply with SATCAR.
We acknowledge that there is already the ability for current referrals of RIs by the ARC to the Conduct Department for reporting to the Conduct Committee. Therefore, there is a process in place where RIs and firms can face sanctions for poor audit work including financial penalties.
- One respondent believed that the proposed change would conflate the important difference and separation between regulatory and disciplinary functions. Firms suggest that regulatory processes should continue to focus predominantly on forward-looking with protection of the public as the key objective with an emphasis on taking steps to ensure better audit quality in the future through conditions and restrictions on licences (whereas disciplinary matters are necessarily backward-looking). Any regulatory penalties for RIs should be limited to technical breaches.
We accept that there is some force in the conflation argument. We have reflected on what the appropriate role of the ARC should be as a regulatory rather than disciplinary committee.
- A concern that the proposed changes to the Audit Regulations will confer the power on the ARC to agree sanctions for RIs where the ‘bar’ for imposing a penalty on an individual is, effectively, much lower.
We do not agree that there would be a lower ‘bar’ for the ARC to issue a penalty to an RI, compared to if a penalty were issued through the disciplinary process.
- A concern that decisions about fitness to practise and those which relate to disciplinary cases are understood in quite different ways by the public. In the firm’s view regulatory decisions about practising rights do not carry any real moral opprobrium in the eye of the public, but disciplinary ones often do.
We disagree that decisions issued by a regulatory committee carry no real moral opprobrium.
- Some firms were also concerned that, as the new regulations provide that any RI who rejects an offer of a regulatory penalty will be referred to the Conduct Department, RIs may feel compelled to accept penalties and sanctions in order to dispose of matters to avoid this. One firm also raised concerns at there being no right of appeal.
We acknowledge that the proposal could lead to RIs feeling under pressure to agree to a consent order. However, we reject the complaint relating to a lack of appeal because RIs have the ability to reject the consent order and defend themselves before the Conduct Committee or a Disciplinary Tribunal.
- Some concern was also expressed that the proposed publication of any RI consent order would act as a further discouragement to those considering applications to be RIs.
While the ARC has discretion on whether to publish its decisions, it is unlikely to find a good reason for not publishing the RI’s name if an RI accepts a consent order. However, this is no different to the current position where an RI is referred to the Conduct Department and is ultimately offered a consent order by the Conduct Committee.
Diversity
- Most responses indicated that there were no issues that appear to arise from a diversity perspective, but two firms made observations that were relevant. One was that publication of breaches may affect non-UK RIs working in the UK and impact their visa applications; in such circumstances the ARC would be alerted to this matter and would take this into account under the sanctions guidelines. The other point raised was that for those entering the audit market from lower income backgrounds the increased perceived risk might discourage their entry compared with better well-off peers. As audit quality and public interest are over-riding factors here this may be a natural consequence which the ARC may however consider when applying sanctioning.
Our response
We have reflected on the feedback provided by consultation respondents and reviewed the approach taken by other accountancy sector regulators. We have concluded that the proportionate approach is to introduce the ability for the ARC to issue sanctions to RIs, but that this power should only apply to breaches which relate to self-standing obligations of individual RIs. At present, the only self-standing obligation for RIs within the Audit Regulations relates to CPD.
Under the 2023 CPD regulations, all members and other individuals regulated by ICAEW (including RIs) are required to undertake a minimum number of hours of CPD, a proportion of which must be verifiable. Should the ARC identify a CPD failure by an RI and determine that some form of regulatory sanction should be issued, the ARC will have the power to increase the RI’s CPD requirements from the minimum hours set out in the CPD regulations. If such an order is made, the RI will need to demonstrate that the order for increased CPD has been complied with.
We consider that this approach enhances the ability of the ARC to deal with breaches of an RI’s self-standing obligations without having to refer the RI to the Conduct Department. The use of an order for increased CPD hours would address the issue in a forward looking way to ensure better audit quality, without issuing a financial penalty to the RI for the historic failing.
All other existing processes concerning regulatory penalties, sanctions and referral of matters to the Conduct Department remain unchanged.
Next steps
The updates to the Audit Regulations will take place in two tranches – the first tranche will include the changes in relation to CPD, plus the other changes outlined above to reflect recent legislative and regulatory developments. The intention is that the first tranche of changes will take effect in the Audit Regulations from 1 October 2024, subject to certain transitional arrangements.
In light of the detailed feedback on the compulsory alternates and RI sanctions proposals, these changes will take place in a second tranche of changes to the Audit Regulations planned for early 2025. This will allow time for accompanying guidance and support material to be produced to address the issues raised during the consultation.