FRC principles for operational separation of audit practices
06 July 2020
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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