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The FRC’s new Ethical Standard takes effect from 15 March 2020. Much has been said about the impact on larger firms that audit public interest entities (PIEs). Here are five to watch for smaller audit firms that don’t operate in that space:

1. Prohibition on contingent fees

Under the previous standard, firms doing R&D work on a contingent fee basis could often work around the restrictions in this area. No longer. This will potentially require a radical change in terms of engagement for this work.

2. Prohibition on internal audit

This seems an obscure point – but not if you’re auditing academy schools. An inconsistency between the requirement here and paragraph 3.17 of the academies’ financial handbook may mean that external auditors can no longer perform the internal control checking required by academies.

3. Long association safeguards

Beyond 10 years the previous standard required SME auditors to assess familiarity threats and consider the need for safeguards. Such safeguards (e.g. second partner review) will now become obligatory.

4. Accounting services

Some of our clients act for AIM list companies and provide limited accounting services by virtue of the client being an ‘SME listed entity’. This concept disappears such that the provision of accounting services for any listed client will now be ruled out.

4. Low fees

Our file reviewers frequently warn firms of the risk for audit quality if fees are very low. The new standard makes clear that ‘there are no circumstances where the amount of the engagement fee can justify any lack of appropriate resource or time taken to perform a proper engagement in accordance with applicable Engagement and Ethical Standards.’ Auditors of small charities and pension schemes beware!

Although the standard takes effect from 15 March 2020, there is a cooling off period where new prohibitions kick in. We will be covering the standard in more detail on audit updates throughout the Spring.

Peter Herbert

February 2020

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