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The Companies Act 2006¹ (the Act) sets out the requirements for a firm or individual to be eligible for appointment as a statutory auditor. In addition, the FRC, in its capacity as the competent authority for the regulation of statutory audit in the UK² , is responsible for determining the criteria for when a firm or individual is eligible for appointment as a statutory auditor. Separate eligibility criteria is published by the FRC (the Eligibility Criteria) to meet this responsibility.

The application of the Eligibility Criteria is delegated by the FRC to the UK Recognised Supervisory Bodies, such as ICAEW, and we set regulations that statutory auditors must comply with in order to be granted, and continue to hold, audit registration.

A firm that complies with the Audit Regulations should also comply with the Act and the Eligibility Criteria

Why are we making changes?

The change we need to make to the Audit Regulations concerns the provisions around ensuring the firm is controlled by qualified persons.

Qualified persons is defined as individuals who hold an appropriate (audit) qualification, certain third country auditors and audit-registered firms (see paragraph 7(2) of Schedule 10 of the Companies Act).


Regulations 2.03b and 2.03c cover these requirements, and state:

‘2.03 The additional requirements for a firm which is not a sole practice, or is a sole practice that is incorporated, are:
…
b individuals who have an appropriate qualification, (including grandfathered EEA auditors and equivalent EEA auditors) and Registered Auditors, or a combination of these hold at least a majority of the voting rights (or hold such rights under the firm’s constitution) as enable them to direct its overall policy or alter its constitution;

c individuals who have an appropriate qualification, (including grandfathered EEA auditors and equivalent EEA auditors) and Registered Auditors, or a combination of these hold at least a majority of the voting rights in the management board (or hold such rights under the firm’s constitution) as enable them to direct its overall policy or alter its constitution;’

Voting rights are currently defined as ‘The rights to vote on all or substantially all matters at meetings of principals or shareholders of the body in question.’

In December 2022, the Eligibility Criteria was updated by the FRC, and a clarification was included to explain how the requirements around control of a firm by qualified persons operate. This was particularly relevant to those firms whose governance arrangements specify different majority percentages for certain decisions. The footnote to paragraph 6(b) of the Eligibility Criteria states:

‘In this context, “majority” means more than 50% of the voting rights, or of such rights under the firm's constitution as enable direction of its overall policy or alteration of its constitution, unless the firm’s constitution specifies a higher percentage of those rights is required for decision-making, in which case, “majority” shall be taken to mean that specified percentage or more.’

During 2023, we had several queries from audit firms about the implications of the clarification to the Eligibility Criteria. In particular, from firms with matters that required ‘supermajority’ approval (for example 75% approval by voting members) but where fewer than 75% of those firms’ voting members were qualified persons.

We engaged with the FRC to establish the correct advice to give to firms. Having obtained advice from leading counsel, we have worked with the FRC on the areas of the Audit Regulations that need to be tightened to ensure they fully comply with the Act.

1 Section 1212

2 Under the Statutory Auditors and Third Country Auditors Regulations 2016