The Department for Exiting the European Union has published a series of presentations focusing on various elements of Theresa May's vision for the UK's future relationship with the EU.
In this insight we look specifically at their presentation on Company law (accounting and audit) which was published on 13 June 2018 and sets out some of the potential difficulties for companies and auditors if a suitable agreement is not reached as part of the Brexit negotiations.
The current position for EU members
At the moment:
- British and other European companies can list securities across borders;
- Audit firm registrations are recognised across borders; and
- Cross border regulatory co-operation ensures compliance.
These conditions allow companies to raise capital more cheaply and help to mitigate the regulatory burden on them.
The current position for non-EU members (so called "third countries")
In contrast, the position for third countries is that:
- Third country companies issuing securities in the EU must prepare accounts using EU-IFRS or standards determined as equivalent by the European Commission;
- Third country companies must be audited by EU statutory auditors or by third country auditors (TCA) registered in the relevant EU member country (audits by a TCA must be inspected unless the third country is deemed equivalent); and
- There is cross border regulatory co-operation only with third country competent authorities deemed adequate.
The future UK accounting and audit regime
The European Union (Withdrawal) Act 2018 has now become law and at 11pm on 29 March 2019 nearly all EU law existing will be reimported into UK domestic law. This will include the EU-adopted IFRS but not the Accounting and Audit Directives which have already been fully transposed. The UK's independent regulator, the Financial Reporting Council, will police the resulting UK corporate reporting and audit framework.
The main objections to moving from the current position to that of a third country is that the existing EU third country regimes do not provide sufficient certainty, continuity, stability or coverage.
For example, EU decisions in the past about whether a third country's corporate reporting framework or audit regulation is "equivalent" have taken between 18 to 24 months. This could leave UK and EU companies with cross border issues in considerable uncertainty as to whether their accounts and audit reports will be compliant. An auditor of a company issuing securities in both the UK and the EU could find itself in breach of legal obligations and cross border filings could be void. Companies could find themselves having to issue two sets of accounts. There would undoubtedly be increased complexity and cost for issuers and auditors.
Following on from this, existing third country equivalence regimes allow equivalence to be revoked without notice – another factor which will impact the confidence of investors and companies across the UK and EU.
There is a risk to preparers, users, and auditors of accounts that, in the absence of a negotiated regime, Brexit will result in additional complexity and an increased regulatory burden. This will be a particular issue for issuers of securities in the UK and EU, and auditors working cross-border.
The UK government is seeking to ensure that the relevant processes are clear from the outset but whether it will succeed in negotiating a regime which addresses these significant issues before the transition period ends on 31 December 2020 is subject to the uncertainty common to all Brexit related questions, and planning for the future will need to start soon.