Changes relating to the statutory audit of public interest entities (PIEs) are part of the government revamp of the UK’s corporate reporting and audit regime. The Financial Reporting Council (FRC) is already progressing some changes (such as PIE auditor registration), while some other changes (such as plans to expand the definition of a PIE) will progress after primary legislation.
All audit firms need to be aware of what’s changing: some will need to act immediately; others may want to consider their options and plans in light of what’s happening and what’s in the pipeline.
PIE auditor registration
From 5 December 2022, all audit firms and Responsible Individuals (RIs) who undertake statutory audit work for PIEs will need to be registered by the FRC.
Firms engaged to audit PIEs need to apply and be approved to be included on the FRC’s PIE Audit Register to prevent any disruption to their work. There is a transition period from 5 September to 4 December 2022 for existing PIE audit firms to submit transitional applications. The FRC published the (46-page) Public Interest Entity Auditor Registration Regulations on 18 August 2022.
Expanded PIE definition
Firms auditing one or more entities that may eventually be designated as a PIE – when the definition expands – have longer to consider their position and take action.
The government is set on expanding the definition of a PIE, bringing as many as 600 more companies under the new classification, so many more audit firms than previously will be affected by this and other PIE-related developments.
The expanded definition is expected to include private companies, AIM-listed companies and third sector companies that have more than 750 employees and an annual turnover greater than £750m, in what many are already calling the 750:750 test. The auditors of these newly designated size-based PIEs have some time to decide their position. The expanded PIE definition is not expected to take effect before 2024 and may be subject to further delay before then.
Some firms are enthusiastic about the opportunity to develop their audit offering in the PIE audit market. Some firms are taking the decision to focus on their core private client work.
PIE audits
Firms that do not currently have PIE audit clients, but have a client that may fall into the expanded PIE definition, can expect a world of difference in terms of becoming registered to audit PIEs, getting their RIs registered to audit PIEs, updating all of their affected guidance, policies and so on. “It’ll be a significant change for any firms new to PIE audits,” says Geoff Swales, Director, PwC, in a recent ICAEW Insights article.
The regulatory regime for PIE audits is more stringent and restrictive than the regime for non PIE audits. “The independence regime for PIEs is more significant on issues such as providing non-audit services,” says Swales. Firms without well-established processes to ensure they do not provide non-audit services to clients they shouldn’t, will need to update their policies and procedures and ensure that all of the firm’s auditors understand what is changing and why.
“PIE auditors have to deal with greater regulatory scrutiny and need to be aware of the nature and extent of the documentation the FRC expects for compliance purposes,” says Katharine Bagshaw, Senior Manager, Auditing Standards, ICAEW. PIE auditors need particular skills and knowledge of all legislation, auditing, ethical and quality management standards relating to PIE statutory audits, which are subject to review by the FRC’s Audit Quality Review team. There’s a lot to think about.
Audit & Beyond
This article was first featured in the October 2022 edition of Audit & Beyond.
