06 July 2020

FRC principles for operational separation of audit practices

The FRC has announced its principles for operational separation of the audit practices of the Big Four firms.

 The objectives of operational separation, which is world leading, are to ensure that audit practices are focused above all on delivery of high-quality audits in the public interest, and do not rely on persistent cross subsidy from the rest of the firm.  Our desired outcomes include:
 

• Audit practice governance prioritises audit quality and protects auditors from influences from the rest of the firm that could divert their focus away from audit quality;
• The total amount of profits distributed to the partners in the audit practice does not persistently exceed the contribution to profits of the audit practice;
• The culture of the audit practice prioritises high-quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement; and
• Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society.

These final principles follow extensive discussions with the audit firms.  The FRC is now asking the Big 4 firms to agree to operational separation of their audit practices on this basis and to provide a transition timetable to complete implementation by 30 June 2024 at the latest.
 
An implementation plan should be submitted to FRC by 23 October 2020. The FRC will then agree a transition timetable with each firm.
 
Thereafter the FRC will publish annually an assessment of whether firms are delivering the objectives and outcomes of operational separation. 
 
FRC CEO, Sir Jon Thompson said:
 

Operational separation of audit practices is one element of the FRC’s
 strategy to improve the quality and effectiveness of corporate 
reporting and audit in the United Kingdom following the Kingman, CMA and
 Brydon reviews. Today the FRC  has delivered a major step in the reform 
of the audit sector by setting principles for operational separation of 
audit practices from the rest of the firm. The FRC  remains fully 
committed to the broad suite of reform measures on corporate reporting 
and audit reform and will introduce further aspects of the reform 
package over time.

Notes to editors:
 
The FRC’s purpose is to serve the public interest by setting high standards of corporate governance, reporting and audit and by holding to account those responsible for delivering them. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.

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