FRC consults on third country auditors to prepare for Brexit

21 January 2019 3 min. read
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With Brexit preparations in disarray, the Financial Reporting Council has opened a consultation with auditors in anticipation of a No Deal scenario. The survey, which lasts until mid-February, will offer up the opportunity for EEA auditors to transfer to a third country status, as the EU Audit Directive may no-longer apply from as early as March 29th, should the UK crash out of the bloc without an agreement in place.

After a vote to accept a proposed withdrawal agreement between the European Union and the UK was defeated emphatically, Britain once again finds itself at square one with regards to Brexit. With beleaguered Prime Minister Theresa May facing an uncertain future, and her plans for secession from the EU now laying in tatters following a historic House of Commons defeat – with an unprecedented 432 votes against trumping the Government’s 202 for – citizens and businesses alike are once more forced to consider what may happen if there is no agreement by the end of March.

In the auditing world, this has seen the UK’s accounting watchdog announce a consultation period to revise the Third Country Auditors (Fees) Instrument 2018, according to industry news site Accountancy Daily. If the UK is unable to agree a withdrawal agreement before 29 March 2019, changes will be needed to accommodate European Economic Area (EEA) auditors and securities in the UK, with immediate effect. To commence this process ahead of time, the Financial Reporting Council will now consult all EEA auditors of EEA securities operating in the UK.

FRC consults on third country auditors to prepare for Brexit

Such firms are currently covered by the EU Audit Directive, which only requires additional registration and regulation of auditors from outside the European Economic Area (EEA). In the increasingly unlikely event of a deal being struck before the end of March, this would be phased out over two years, as all EEA states will become third countries to the UK after Brexit. However, in a No Deal scenario, the UK and the EU will not provide such an implementation period, meaning the UK will apply the third country auditors’ (TCA) regime to non-UK auditors from this spring.

The FRC has asserted that it does not intend to change the current fee structure or increase charges, but all EEA auditors of EEA securities (all equity and debt denominations of less than €100,000 (£89,900) listed on regulated exchanges in the UK will now be required to register as third country auditors in the UK. In a statement to the press, the FRC confirmed that it “expects that there will be an increase in the number of audit firms registering as TCA audit firms. This means that there will be economies of scale and the costs can be shared between more firms.”

The draft 2019 Instrument which the consultation will ultimately work towards will also reflect changes to legislation that will be made as a result of the UK’s exit from the EU without a withdrawal agreement or implementation period being in place and revoke the Third Country Auditors (Fees) Instrument 2018. It is thought to be unlikely that there will be any objections to the proposals since the 2018 instrument was also implemented without objections. The consultation closes for comment on 7 February 2019.

Related: Kingman Review says FRC should be replaced 'as soon as possible'.