Case studies
Case study 1: Director without audit affiliate status
The sole RI appointed their non-accountant spouse as a director several years previously. The spouse did not have any involvement in client-facing work. The firm had not notified ICAEW of the appointment of a second director, and did not contact ICAEW subsequently despite the inclusion of only one director on annual returns.
The firm was ineligible for audit registration under Audit Regulation 2.03a as the spouse did not have audit affiliate status. It had not complied with Audit Regulation 2.11 by not informing ICAEW of the additional director. In addition, the firm had not complied with Audit Regulation 6.06 by not recognising and correcting the omission in the list of directors on subsequent annual returns.
The firm had incorrectly saved fees relating to the:
- application, and annual fees for audit affiliate status, and
- annual audit registration fee for a sole practice compared to a two principal firm.
Case study 2: Corporate practice: change to firm structure
A corporate practice with three principals restructured to insert intermediate companies, each wholly owned by one of the principals, as equal shareholders in the practice itself. ICAEW records continued to show the principals as the shareholders of the practice, rather than the new corporate shareholders. The firm did not inform ICAEW of the change, considering that the effective ownership of the practice was unchanged. This was non-compliance with Audit Regulation 2.11.
The firm was ineligible for audit registration from the point at which the shares were transferred from the principals to the intermediate holding companies. Audit Regulation 2.03b requires a majority of voting rights to be held by individuals with an appropriate qualification or registered auditors. In this structure, two of the three+ intermediate companies needed to apply to be registered as audit firms in their own right, and pay consequential audit registration fees.
Case study 3: Voting rights
A limited liability partnership has two members, one is the responsible individual (and therefore has an appropriate qualification) and one is an ICAEW member but does not hold an appropriate qualification (ie an audit qualification).
In response to a previous discussion with ICAEW, the firm confirmed that a casting vote in the members’ agreement gave the responsible individual control.
We reviewed the members’ agreement at an audit monitoring visit, and found it only gave the responsible individual a casting vote on matters relating to audit. On discussion with the members it was clear that there was no intention for the responsible individual to have greater control over the practice as a whole.
This arrangement does not comply with Audit Regulation 2.03b because the individual with an appropriate qualification did not hold the rights under the firm’s constitution to enable them to direct its overall policy or alter its constitution. In this case there were no fees saved, but this did not change the conclusion that the firm had been ineligible for audit registration for several years.
Regulatory penalties
The committee imposes regulatory penalties for eligibility issues, and these may include both a penalty for acting as registered auditor when ineligible, and a sum to reflect audit registration and affiliate fees saved. These penalties can be substantial. Some firms would not have made the structural change in the first place had they realised the impact on fees.
The committee also publishes regulatory penalties on our website, naming the firm and the circumstances that led to the breach of the Audit Regulations.
How to notify us
If you make any change to your firm’s structure, including owners, principals or the addition of intermediate holding companies, you must inform ICAEW within 10 business days by emailing regulatorysupport@icaew.com
Additionally, if you realise that your firm structure is incorrect in your annual return, you should contact regulatorysupport@icaew.com to inform us as soon as possible.
Dispensations
You can apply for a dispensation to cover a temporary period of ineligibly, and this application must be within 10 business days of the issue arising. The dispensation will not last for more than 90 days starting from the date that the situation first arose.
Further information:
Join the Audit & Assurance Faculty
