The ethical principles that apply to auditors are similar to those that apply to accountants generally – with a risks and safeguards approach taken to address many of the issues that firms face day to day. Auditors must apply the FRC Ethical Standard (ES).

The latest version of ES took effect from March 2020. Here are some scenarios relating to the application of ES that have cropped up recently:

 One of our firm’s partners helped set up some client family trusts many years ago. She is a trustee. One or two of the trusts own shares in family companies which happen to be audit clients. Is this ok?

Paragraph 2.16 of ES states that where any financial interest in an entity relevant to the engagement, or in any affiliate of such an entity, is held in a trustee capacity by a covered person, or by a person closely associated with them, a self-interest threat may be created because either the existence of the trustee interest may influence the conduct or outcome of the engagement or the trust may influence the actions of the entity. Whilst a risks and safeguards approach can technically be adopted, professional bodies frown on such arrangements and they should be avoided at all costs.

Your firm is the auditor of a heritage railway. The company is a charity, founded in 1975. Your firm has owned one share in the company since its incorporation. Dividends are never paid. Is this ok?

Paragraph 2.3 of ES states that the firm, each partner in the firm, each covered person and any persons closely associated with any such partner or covered person, shall not hold any direct financial interest in an entity relevant to the engagement (i.e. an audit). This arrangement would thus be strictly prohibited.

The spouse of your firm’s managing partner is the financial controller of an audit client. The managing partner has no involvement in the audit.

In dealing with employment relationships, paragraph 2.34 of ES states that persons or firms referred to in paragraph 2.4 shall not have an employment relationship with an entity relevant to the engagement.

Paragraph 2.4 refers to ‘the firm, each of the firm’s key audit partners and each of the firm’s directly involved covered persons for any engagement, and any persons closely associated with the firm or any such partner or covered person.’ It might be possible to argue that the managing partner’s spouse is not covered by the paragraph 2.34 requirement, but, stepping back, the reasonably informed third party would surely have issue with this. The firm should not be acting as auditor.

You are an RI in a 10-partner firm. There are several audits where you have been incumbent for more than 10 years. What should you do?

Changes were brought in here by ES in March 2020. There is a subtle change in the way that the paragraph that applies where an engagement partner has held this role for a continuous period of ten years is framed.

Where they are not rotated after 10 years, it is noted as important that:

a) safeguards are applied (e.g. consultation review); and

b) the reasoning as to why the individual continues to participate in the engagement is documented and the facts are communicated to those charged with governance of the entity.

 It is requirement (b) above that many firms seem to be unaware of and that crop up lots on cold file reviews.

Your firm has recently helped a client implement an off the shelf cloud computing software package (creation of chart of accounts, transfer of data etc). Is this allowed under the Ethical Standard and, if not, what are the implications?

Para 5.50 of ES strictly prohibits this. A risks and safeguards approach simply can’t be adopted. Since this is a breach of the ES, the firm should self-report to its professional body. A further debating point is whether the firm should resign. Many feel that this wouldn’t be necessary provided that management accepted the need to ‘own’ their own accounting system, including the chart of accounts, handling updates to the system etc.