Operational separation of audit practices – some changes

The Financial Reporting Council has made some changes to its principles for operational separation of the audit practices of the Big 4 firms.

Following the analysis of the firms’ implementation plans the FRC has:

  • Confirmed that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivised for sales passed to other parts of the firm.
  • Increased the minimum proportion of revenue within the ring-fenced that must be derived from audit.
  • Clarified that services provided by non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients.

FRC explained that 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. Its desired outcomes are:

  • Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society.
  • The culture of the audit practice prioritises high-quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism/judgement.
  • 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.