Navigating the ICAEW’s new audit regulations: ensuring compliance before the April 2025 deadline

Now that the festive cheer is wearing off, partners in many accountancy firms with an audit practice will be turning their minds to addressing the recent changes to the ICAEW’s requirements for how such firms are governed.

In August 2024, the Financial Reporting Council (the authority for the regulation of statutory audit in the UK) published a position statement regarding the interpretation and application of certain provisions of the FRC’s Eligibility Criteria and related provisions of the Companies Act 2006. The position statement was intended to clarify a tension that existed between potentially conflicting interpretations of the eligibility criteria for firms registered as statutory auditors.

Steps to ensure compliance

Following consultation and the FRC’s position statement, as of 1 October 2024, the ICAEW implemented a number of amendments to the UK Audit Regulations and Guidance. Amongst those amendments are changes to the eligibility criteria, aligning the ICAEW’s criteria with the FRC’s requirements. Firms that fail to address the new requirements may no longer satisfy the ICAEW’s eligibility requirements and therefore could lose their audit registration.

The updated regulations include new definitions of “voting rights” and “majority”:

• “Voting rights” means the rights to vote at meetings of principles or shareholders of a firm on all matters that direct firm’s overall policy or alter its constitution.
• “Majority” means more than 50%, unless the firm’s constitutional documents specifies that a higher percentage of voting rights is required for decision making, in which case “majority” shall be taken to mean that higher specified percentage or more.

These new definitions are giving many firms a headache, since in a well-diversified accountancy practice qualified audit partners may well not have the power to direct the overall policy of the firm or to change its constitution. It is not sufficient for qualified persons to simply have a right to veto a decision.

Constitutional amendments and ownership structure challenges

Given it is possible that the amendments made to the regulations will impact whether a firm is eligible for registration as a statutory auditor, the ICAEW is advising all firms to review the changes made to the regulations, review their constitutional documents and ownership, and to take the necessary steps to ensure firms will continue to be eligible for audit registration.

Amendments to a firm’s constitutional documents are rarely easy to implement, particularly when the changes may diverge from the current – and commercially desired – allocation of voting power. Implementing those amendments may be particularly challenging for firms with complex ownership structures. These amendments may be of particular concern for registered firms who are part of a wider group and may therefore be a subsidiary of a non-registered entity, or for firms who have received or are considering outside investment.

How to prepare in the run up to the deadline

Firms have until 1 April 2025 to comply with the new criteria. If the ICAEW finds that a firm has not made the requisite changes to their governance documents and structure by this date, then the firm will be ineligible for audit registration and will be reported to the Audit Registration Committee for the cessation of its registration.

Given the need to both formulate the appropriate changes to a firm’s constitution and to obtain partner approval for potentially contentious changes, time is short.  That is particularly the case if engaging with the ICAEW to obtain their view on proposed changes, or if substantive changes to the business – such as hiving off the audit practice – are the preferred solution.  If re-opening the constitution for review, firms may also want to take the opportunity to update provisions which are out of date or off-market.