FRC consults on third country auditors to prepare for Brexit

21 January 2019

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'.

More news on


UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”