Is Your Firm Ready for Changes to UK Audit Regulations?

There was a recent important revision to Audit Regulations to bring them in line with the Companies Act 2006. The updated regulations came into effect on 1 October 2024 for new audit firms, but firms registered prior to that date have until 1 April 2025 to comply.

These are crucial changes, as they may impact on a firm’s eligibility to be audit registered. In fact, a number of audit firms are scrambling to revise their ownership structure and / or constitution to comply.

In this article, we explain the changes and give further details on what firms should do now.

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Key changes to UK audit regulations

The eligibility requirements have changed for clarity. If a firm's constitution requires more than a simple majority to approve certain decisions, audit-qualified persons must have control over these super-majorities. This applies when the decisions relate to strategic matters, rather than just having the power to veto them.

The previous Audit Regulation 2.03 required individuals who have an appropriate qualification (which in practice equates to the Audit Qualification in the majority of cases), and Registered Auditors (e.g. another registered audit firm) to hold:

Audit Regulation 2.03b

At least a majority of the voting rights (or hold such rights under the firm’s constitution) as to enable them to direct its overall policy or alter its constitution;

Audit Regulation 2.03c

At least a majority of the voting rights in the management board (or hold such rights under the firm’s constitution) as to enable them to direct its overall policy or alter its constitution.

These parts of the regulations have not changed, however there are revisions to the supporting guidance notes and definitions used in the Regulations which have brought renewed focus on what constitutes control, and in particular seeks to address situations where a firm’s constitution requires a ‘supermajority’ for some decision making.

Therefore, in the context of regulation 2.03 ’majority' of the voting rights means more than 50% unless the firm's constitution specifies that a higher percentage of these rights is required for decision making, in which case, ’majority’ shall be taken to mean that specified percentage.

In turn, this means that where a supermajority is required to affect changes to the firm’s overall policy / allow alterations to the constitution then the supermajority must be held by individuals with the Audit Qualification (AQ) (and/or Registered Auditors (RAs)).

The effect of these upcoming changes is that individuals with the AQ and / or RAs, must be able to force through changes in the firm’s constitution (and other strategic changes such as pricing, name, location, capital requirements, profit sharing, appointment of new principals etc). It is not sufficient for those with an AQ and / or RAs to simply veto these changes.

This may not be a problem for firms with a simple partnership or LLP agreement that allows a majority to control everything, but any agreement that has supermajority for certain strategic issues (and this usually includes companies using the model articles) will have a problem and will need to ensure the right people can exercise that supermajority.

What are the next steps for my firm?

Firms will need to ensure that they have checked their constitution and compared those requirements to the revised audit regulations. This may then require a change to voting rights or the constitution itself.

If the firm needs to confirm which of it’s owners have an AQ, they should contact the ICAEW via AQ@icaew.com.

If the firm makes changes to ownership, the ICAEW should be told via regulatorysupport@icaew.com within 14 days. It should be noted that a change on the annual return is not proper notification.

Firms may decide to move their audits into a new firm that has a different ownership structure. However, care is needed when doing this as it could lead to a fee dependency risk where audits are more than 10% of that firm’s fees. If it can be argued that the audit and non-audit firm are under common control then fees of the whole firm can be used, but in many cases the audit firm has very different ownership and so must be considered in isolation.

In all cases, early consideration is needed as registering new firms and taking legal and / or ICAEW advice takes time and the deadline for compliance is less than a month away at the time of writing (6 March 2025).