In this alert, Partners Nick Leale and Corinne Staves discuss the impending 1 April deadline for firms to comply with audit registration requirements, including the risks, key milestones following a potential breach and the steps firms should take to ensure compliance.
The weeks are ticking by towards the 1 April deadline for firms wishing to remain eligible for audit registration who currently undertake audit work.
Firms must ensure by then that all matters affecting overall firm policy or that alter its constitution are approved by qualified persons (i.e. by those who hold an appropriate audit qualification). The key requirement therefore is that the firm includes qualified (audit) persons in sufficient number for them (i.e. the audit qualified group) to be able to vote through (via their voting rights) any changes in the firm’s future direction or its constitutional arrangements.
The numbers required will of course depend upon the percentages required by the firm’s constitutional arrangements for a direction/change to be approved. The ability of an audit qualified person to veto a motion/change is not sufficient. If the firm’s management is overseen by a Board of Directors or other management group, again, the requirements for approval within that context (majority/supermajority) must be met by that level of support of audit qualified persons on that Board/group.
The risk of regulatory action on this issue arises immediately from 1 April 2025 as the ICAEW could conduct a monitoring visit or request information from the firm for a host of other reasons without notice.
Whether something is a constitutional change is of course a binary question. Whether a matter is directing the overall policy of the firm is of course more judgemental. Is it a significant decision? That depends on the facts in question, but firms should err on the side of caution when assessing the position especially in the initial period of uncertainty with regard to how the ICAEW may consider such issues for themselves. The ICAEW has stated that, in broad terms, directing the policy of a firm means directing how managerial, financial and administrative mechanisms are to be arranged to reach explicit goals. That is a wide definition.
The ICAEW have offered one potential saving grace! Within 10 business days of any breach (i.e. by 10 April 2025, but you will want to make any application well before then in reality if needed) your firm can apply for a 90-day dispensation – the firm will though have to demonstrate that it is taking all necessary steps to resolve the matter and will ultimately be at the behest of the ICAEW’s Registration Committee – and the 90 days cannot be extended.
This is not, by the way, the closure to this year’s changes to the Audit Regulations. In March 2025, the ICAEW’s Regulatory Board are expected to approve new notification requirements for registered audit firms when they are appointed to audits that are potentially complex or high risk and new requirements extending the requirement for sole practitioners to appoint an ‘alternate’ to sole practice auditors. This follows a consultation on this issue and the ICAEW, as a result of the feedback received, proposing the extension of who can act as an alternate. We will provide a further update on the detail behind these changes after the Regulatory Board’s March meeting.
Partner Corinne Staves offers some practical advice as to what firms need do in short time to ensure compliance:
Firms must ensure by then that all matters affecting overall firm policy or that alter its constitution are approved by qualified persons (i.e. by those who hold an appropriate audit qualification). The key requirement therefore is that the firm includes qualified (audit) persons in sufficient number for them (i.e. the audit qualified group) to be able to vote through (via their voting rights) any changes in the firm’s future direction or its constitutional arrangements.
The numbers required will of course depend upon the percentages required by the firm’s constitutional arrangements for a direction/change to be approved. The ability of an audit qualified person to veto a motion/change is not sufficient. If the firm’s management is overseen by a Board of Directors or other management group, again, the requirements for approval within that context (majority/supermajority) must be met by that level of support of audit qualified persons on that Board/group.
The risk of regulatory action on this issue arises immediately from 1 April 2025 as the ICAEW could conduct a monitoring visit or request information from the firm for a host of other reasons without notice.
Whether something is a constitutional change is of course a binary question. Whether a matter is directing the overall policy of the firm is of course more judgemental. Is it a significant decision? That depends on the facts in question, but firms should err on the side of caution when assessing the position especially in the initial period of uncertainty with regard to how the ICAEW may consider such issues for themselves. The ICAEW has stated that, in broad terms, directing the policy of a firm means directing how managerial, financial and administrative mechanisms are to be arranged to reach explicit goals. That is a wide definition.
The ICAEW have offered one potential saving grace! Within 10 business days of any breach (i.e. by 10 April 2025, but you will want to make any application well before then in reality if needed) your firm can apply for a 90-day dispensation – the firm will though have to demonstrate that it is taking all necessary steps to resolve the matter and will ultimately be at the behest of the ICAEW’s Registration Committee – and the 90 days cannot be extended.
This is not, by the way, the closure to this year’s changes to the Audit Regulations. In March 2025, the ICAEW’s Regulatory Board are expected to approve new notification requirements for registered audit firms when they are appointed to audits that are potentially complex or high risk and new requirements extending the requirement for sole practitioners to appoint an ‘alternate’ to sole practice auditors. This follows a consultation on this issue and the ICAEW, as a result of the feedback received, proposing the extension of who can act as an alternate. We will provide a further update on the detail behind these changes after the Regulatory Board’s March meeting.
Partner Corinne Staves offers some practical advice as to what firms need do in short time to ensure compliance:
- Review the firm’s structure. Which entity/ies require an audit licence?
- For those entities, identify the decision making powers and who controls those decisions in practice.
- Split the decisions into those which need to be controlled by audit qualified persons, and those that do not.
- Identify a workable solution for your firm:
- In some cases, the firm’s constitution can be varied to ensure that those decisions are, and always will be, controlled by audit qualified persons. This may be politically sensitive as the class of decisions is wide, and the non audit partners may be reluctant to put control over those decisions in the hands of audit partners alone. This is likely to be especially relevant if audit is a smaller part of the firm’s overall business.
- If it is not appropriate for audit partners to control those firm-wide decisions, the firm may wish to create a separate entity through which audit services are provided to clients. That new entity alone can be controlled by audit partners, although consideration should be given to how the new entity aligns with the firm’s overall governance arrangements. If firms choose to do this, they will need to act fast as registration of the new entity with ICAEW will take weeks. Firms will also need to consider wider issues, including tax and implementing new engagement letters between the new entity and audit clients. Finally, firms will want to consider how the new entity is owned and how profits of that entity are shared. Constitutional changes are likely to be needed to create a notional combined profit pool in which partners share, to ensure partners’ compensation arrangements do not change as a result of the structural changes. Finally, if audit partners have ownership stakes in the new audit entity, consider whether those partners would or should benefit personally on a capital event such as a sale, listing or PE investment. How will the firm assure fairness for both audit and non audit partners?
- In some cases, the firm’s constitution can be varied to ensure that those decisions are, and always will be, controlled by audit qualified persons. This may be politically sensitive as the class of decisions is wide, and the non audit partners may be reluctant to put control over those decisions in the hands of audit partners alone. This is likely to be especially relevant if audit is a smaller part of the firm’s overall business.
- The firm needs to implement these changes. A revised constitutional deed, such as LLP agreement or shareholders’ agreement, is likely to be needed. There will be a process to vary the existing documents and this will need to be followed in order to validly implement the changes. Management teams will not want to leave this until the last minute.
If you would like to discuss audit eligibility requirements in relation to your firm specifically, or if you have any questions arising from this alert, please contact Partners Nick Leale or Corinne Staves, both of whom are part of CM Murray’s full-service Regulatory Unit, dedicated to providing top-tier regulatory and professional discipline advice to firms and individuals in the legal, accountancy and other sectors.
