What Brexit means for audit
Anne Adrain and James Barbour summarise the opportunities that might emerge in the audit market following the UK decision to leave the EU.
In the UK, the Financial Reporting Council (FRC) is responsible for developing and maintaining auditing standards and guidance. The FRC has required the use of International Standards on Auditing (ISAs) (UK), which are substantively based on the ISAs produced by the International Auditing and Assurance Standards Board, (IAASB) since 2005.
Historically, the FRC, and indeed the UK, has tended to lead the way in seeking to shape and adopt any revisions to these ISAs. The use of ISAs in the EU is not yet mandated, although the European Commission has the power to do so provided certain criteria are satisfied.
The use of globally recognised high-quality standards on audit has undoubtedly been beneficial to the UK audit profession as it offers a degree of international harmonisation across the audit market which we believe is appropriate for our business environment.
Audit is a highly-regulated activity; the regulation is generally clear (although in some respects the recent EU reforms have decreased the level of clarity), understood and works.
As a result, our assessment of the potential impact of the decision to leave the EU on audit, at least in the short-term, is low. However, we believe Brexit may present an opportunity to revisit some of the changes introduced by the EU audit reform.
Impact of EU audit reform on UK audit market
Audit retendering and rotation requirements have been introduced for public interest entities (PIEs) by the EU Audit Regulation and transposed into UK law. The UK has been a key driver in the development of requirements around audit retendering (via the Competition and Markets Authority Order) and previously by the FRC via the UK Corporate Governance Code.
Although potential for change exists following Brexit, the UK direction of travel has been to support more frequent retendering of audits of certain listed entities and changes have now been embedded and accepted as part of good practice.
The probability and appetite for further change would therefore appear to be low. It is, however, possible that the UK could revisit the scope of certain aspects of the EU audit legislation if these prove to be unduly burdensome in practice.
In relation to the provision of non-audit services by auditors to their PIE audit clients, it would appear sensible to continue with the new requirements for the time being. During the development of the EU audit legislation, the views of UK investors were divided over the extent to which further prohibitions on non-audit services should be introduced with some supportive of even greater prohibitions. We would prefer to see how the new requirements work in practice, allowing a period of three to five years before the FRC undertakes a review of how well the new rules are working.
Opportunities provided by Brexit
There is, however, a need for greater clarity on certain aspects of the EU audit legislation and Brexit may provide an opportunity for some areas to be revisited and clarified.
The FRC Audit Technical Advisory Group is working on this, but in some areas the FRC is seeking to persuade the CEAOB, the Committee of European Auditing Oversight Bodies (the newly established EU audit regulatory oversight and liaison body), to issue an interpretation, as a more expedient approach.
The small company audit and reporting thresholds (UK) have been increased in accordance with the EU Accounting Directive so, theoretically, the UK could choose to change these, i.e. reduce the small company audit limits or indeed even increase them further.
We assume, however, that the UK government’s probability and appetite to change, is low. ICAS believes that a proportionate audit is beneficial and in the public interest. Therefore, we do not support the current level of audit exemption thresholds, but we appreciate that it is unlikely that the UK government will revisit these in early course following Brexit.
In light of the referendum result, it may prove to be difficult for the FRC to exert any influence over the CEAOB; however, they could influence other regulatory stakeholders (for example, the International Forum of Independent Audit Regulators, IFIAR)) and the standard-setters (for example, IAASB and the International Ethics Standards Board for Accountants (IESBA)) which could ultimately have an influence on the CEAOB.
The FRC should also ensure that it continues to lead the way on the global stage as this will have some impact on, and influence over, at least some of the remaining EU member states.
Have your say
ICAS is looking to its members for their opinions on Brexit. As leaders in business, finance and politics, the voices of CAs need to be heard now more than ever. Get in touch with ICAS to share your views, stories and opinions on Brexit and beyond.