Auditor independence and the FRC Ethical Standard

UK auditors must follow the FRC’s Ethical Standard, currently the Revised Ethical Standard 2024, which took effect on 15 December 2024. It requires the audit firm and everyone able to influence the audit to be free from conditions and relationships that would lead an objective, reasonable and informed third party to conclude that independence is compromised. It sets specific rules on fees, long association and non audit services, with limited relief in Section 6 for audits of small entities that are not public interest entities.

What is the Ethical Standard and who must follow it?

The Ethical Standard applies to audit engagements and other public interest assurance engagements (paragraph I1). Part A sets out overarching principles of integrity, objectivity and independence with supporting ethical provisions. Part B sets out specific requirements in six sections: general requirements, relationships, long association, fees and related issues, non audit services, and the provisions for small entity audits. Paragraph I10 makes clear that meeting the Part A outcomes is paramount, so ticking off Part B is not always enough.

Paragraph 1.73 makes the 2024 standard effective from 15 December 2024. Under paragraph 1.74, engagements for periods beginning before that date could be completed under the previous standard. The law also sets a floor: section 1214 of the Companies Act 2006 prevents an officer or employee of the company, or of an associated undertaking, from acting as its statutory auditor.

The Ethical Standard sits alongside the professional bodies’ codes. For non audit assurance work the professional body codes usually apply instead, as explained in our page on independence in non audit assurance work, and the general principles are covered in the fundamental principles of the code of ethics.

What does independence mean under the standard?

The standard defines independence as freedom from conditions and relationships which, in the context of an engagement, would compromise the integrity or objectivity of the firm or covered persons. The test is not whether the firm believes it is objective. Paragraph I15 says independence is compromised if it is probable, meaning more likely than not, that an objective, reasonable and informed third party would conclude that integrity or objectivity is compromised, taking safeguards into account. Paragraph I14 describes this third party as informed about the roles of auditors, directors and management, and not another practitioner.

Under provision A2.1, an auditor must be independent at least throughout the period covered by the accounts being audited and until the audit is completed. A relationship that ended before the audit starts can still be a problem if it existed during the year under audit.

What threats must the auditor consider?

Paragraph 1.33 lists the principal threats:

• Self interest, for example holding an investment in the client, wanting to sell it other services or needing to recover overdue fees.
• Self review, where the auditor audits figures produced by its own non audit work, such as bookkeeping or valuations.
• Management, where the firm makes judgements and decisions that belong to management. Any service that would require the firm to take a management role is prohibited because the threat cannot be safeguarded.
• Advocacy, acting for the client in an adversarial or promotional setting, such as litigation.
• Familiarity or trust, often from long association with the client’s people.
• Intimidation, where the auditor is influenced by fear, for example by an aggressive or dominating individual.

Gifts and hospitality are also restricted: provision A2.10 allows them only if a reasonable third party would consider their value trivial or inconsequential. Our page on gifts and hospitality covers this in more detail.

How do fees affect independence?

Section 4 deals with economic dependence on a single client or group of clients under common control. For a non listed entity that is not a public interest entity, paragraph 4.22 requires the firm to resign or not stand for reappointment if fees are expected to regularly exceed 15% of the firm’s annual fee income, or of the part of the firm by reference to which the engagement partner’s profit share is calculated. Between 10% and 15%, paragraph 4.29 requires disclosure to the Ethics Partner and to those charged with governance, and an external independent quality control review before the report is finalised. For public interest entities and other listed entities, the limit is 10% (paragraph 4.21), with disclosure required above 5% (paragraph 4.25).

Paragraph 4.30 gives new firms a short transition: for up to two years they can audit a non listed client representing more than 15% of fee income if an external independent quality control review is done before the opinion is issued. For public interest entities, paragraph 4.13 caps fees for permitted non audit services at 70% of the average audit fees for the last three consecutive financial years.

Can the auditor also do the accounts and tax?

For listed entities, paragraph 5.124 prohibits accounting services altogether. For other entities, accounting services are prohibited if they involve the firm taking part of the role of management or initiating transactions, or if they are anything other than routine or mechanical with little or no professional judgement. Paragraph 5.128 allows routine services with safeguards, and paragraph 5.131 suggests safeguards such as using staff with no involvement in the audit and an independent review. Paragraph 5.129 lists decisions the firm must not take, including authorising transactions, preparing originating data and changing journals without management approval.

Advice arising during the audit, such as pointing out weaknesses in the records or errors in the draft accounts, is treated by paragraph 5.125 as a by product of the engagement and not as a separate service. The detail of the self review issues is covered in our page on self review threats in preparing audit clients’ accounts.

How long can a partner stay on the same audit?

For all audits, paragraph 3.1 requires firms to assess long association threats and apply safeguards, and paragraph 3.2 requires them to monitor how long senior people have served on each client. Paragraph 3.4 lists safeguards including rotation after a set number of years and an independent partner review. For a non listed audit, paragraph 3.5 says that once an engagement partner has held the role for ten continuous years, careful consideration must be given to whether a reasonable third party would see independence as compromised. If the partner is not rotated, safeguards must be applied and the reasons documented and communicated to those charged with governance. For public interest entities, paragraph 3.9 requires key audit partners to cease participating no later than five years from appointment.

What relief is there for small entity audits?

Section 6 does not apply to public interest entities. Paragraph 6.4 defines a Small Entity to include a company that is not a UK listed company or an affiliate of one and qualifies as small under section 382 of the Companies Act 2006, or a group that qualifies as small under section 383. The size tests are explained in our page on company size thresholds. The main provisions are:

• no external independent quality control review where fees are 10% to 15% of fee income, though the expectation must still be disclosed (paragraphs 6.5 and 6.6);
• no safeguards needed for self review threats from non audit services if the client has “informed management” and the firm extends its cyclical inspection of completed audits (paragraph 6.7);
• exemption from the management threat prohibitions if the firm discusses objectivity and independence with those charged with governance and management accept responsibility for decisions (paragraph 6.11);
• exemption from the rules on tax services involving advocacy (paragraph 6.12) and on former partners joining the client, subject to conditions (paragraph 6.13).

Where the firm uses the exemptions in paragraphs 6.11 to 6.13, paragraph 6.15 requires the audit report to say so and the accounts or audit report to disclose the type of non audit services provided. Paragraph 6.16 confirms this is a separate paragraph that does not affect the opinion.

How might this work in practice?

Illustration only. A two partner firm audits a small manufacturing company and also prepares its corporation tax computation and year end adjustments. The finance director understands the adjustments and approves each one. The firm treats the work as routine, uses the Section 6 exemption for management threat after discussing it with the board, discloses that in the audit report, and adds the file to its cyclical inspection sample. Its fees from the client are 12% of the firm’s income, so the partner discloses this to the Ethics Partner and the board; because the client is a Small Entity, no external review is required.

What mistakes do firms and clients make?

• Assuming independence only needs to exist on the day the audit starts, instead of throughout the period audited.
• Letting the firm post journals or make classification decisions without management approval.
• Forgetting the disclosure in the audit report when Section 6 exemptions are used.
• Not monitoring fee dependence across clients under common control.
• Keeping the same engagement partner well beyond ten years without documented reasoning.

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Related Accountapedia entries

• Fee dependency on a single client
• Can an accountant lend to or borrow from a client
• Internal audit vs external audit
• Engagement quality reviews under ISQM (UK) 2
• Can an accountant hold shares in a client company
• ISQM (UK) 1 quality management

Related cover: Professional indemnity insurance for accountants. Ask for a quote or call 01795 841 310.

Sources

• Financial Reporting Council: Revised Ethical Standard 2024 orZHKLq
• legislation.gov.uk: Act 2006 c. 46, section 1214

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.