The UK’s exit from the EU means that the UK will need to maintain equivalence on audit regulation in order to ensure regulatory cooperation with the EU, and this will require that the UK and EU are able to compare company accounts across jurisdictions, and will need an International Financial Reporting Standard (IFRS) endorsement process.

According to the FRC report, Annual review of corporate governance and reporting 2017/2018, ‘When the UK exits the EU, many legislative requirements will need to be replicated in UK law to ensure continuity and legal certainty. These will include the text of EU-adopted IFRS which are applied in the UK by listed companies under existing law, AIM companies under market rules and voluntarily by some other companies.’

Under EU rules for third country equivalence, holding companies from third countries that list equity on EU markets must prepare accounts either using EU-adopted IFRS or standards that have been determined as equivalent by the European Commission. Companies listing securities must be audited by EU statutory auditors or auditors that are registered in the relevant member state, and these audits must be inspected unless the third country is deemed equivalent.

EU competent authorities may only transfer audit working papers and investigation reports to a third country competent authority that is deemed adequate, due to the need ‘to maintain audit and accounting quality and ensure consistent standards of auditor independence’.

UK-adopted IFRS will also have to maintain equivalence with the EU. In order for this to occur ‘a process for the assessment and endorsement of new and revised IFRS in the UK will be required’, FRC said.

According to the FRC, ‘the precise form of this process is being developed by government in consultation with regulators, partner bodies and industry stakeholders. It will also be subject to parliamentary scrutiny.’

‘The FRC is working in partnership with BEIS to create a UK IFRS endorsement board which will be responsible for assessing new and revised IFRS for consistency with certain prescribed criteria. It is expected that the FRC will provide oversight of the governance of the endorsement board and its compliance with due process.’

According to minutes of a meeting of the Corporate Reporting Council, held on 11 September 2018, the UK IFRS Endorsement Board 'would sit within the FRC' and careful consideration of 'matters such as resourcing and appointments process' was taking place.

It ws also noted that following the FRC’s application to the Accounting Standard Advisory Forum (ASAF) for membership, which would be necessary after Brexit, 'the chair of the IFRS Endorsement Board or the most senior member of its secretariat will be the member of the ASAF'.

Report by James Bunney