Impact of the end of the Brexit transition period on audit rights in the UK and Ireland
The transition period which followed the exit of the UK from the European Union ended on 31 December 2020.
Previous ICAEW guidance set out the transitional arrangements ie, the regulation of audit in the UK and Ireland would continue after 31 January 2020, but that arrangements should be made on the basis that a trade agreement would not be concluded by 31 December 2020.
The trade agreement that was signed off on 24 December 2020 contains a number of gaps in the area of services, especially on the mutual recognition of qualifications and data transfer. The preparations made for no trade agreement in relation to the regulation of audit therefore apply from 31 December 2020, until subsequent negotiations dictate otherwise.
From 1 January 2021 the following apply in respect of audit regulation in the UK and Ireland:
- In the UK new January 2021 audit regulations apply.
As part of the planning for Brexit, draft UK audit regulations were prepared. These draft regulations have been updated for minor technical changes and will now take effect from 1 January 2021. The major changes involve the qualification of EEA auditors and firms that could affect responsible individual (RI) status and ownership tests.
- In Ireland the January 2020 regulations continue to apply in respect of Ireland only.
The Irish government and IAASA, despite government announcements, have not made legislative changes in Irish law that would change the basis of registration and qualification in Ireland. Accordingly the joint audit regulations for the UK and Ireland dated January 2020 continue to remain effective after 1 January 2021 until legislative change is made, or direct instruction made otherwise by the oversight body.
The new UK audit regulations reflect the changes in the relationship between the UK and the EU with EU rights becoming third country rights. The key elements are;
- EU qualified RIs on the UK audit register at 31 December 2020 are grandfathered through to 2021 and beyond and can continue to be part of the audit firm ownership tests.
- EU audit firms can no longer count towards the audit firm ownership tests.
- In the absence of provision within the trade agreement, no EEA qualification is recognised for UK audit registrations from 1 January 2021 until mutual recognition is established.
- However, EEA qualified individuals in the process of seeking recognition as an RI in the UK at 31 December 2020 can continue to secure that recognition. Note these individuals do not count as part of the audit ownership tests until they have completed the aptitude test.
- EEA individuals who secure a qualification with a RQB - recognised qualifying body will continue to be recognised though they may need to sit an aptitude test.
- Firms that will no longer meet the ownership test of a required majority due to disqualification of EEA firms and individuals need to apply to the Audit Registration Committee for a dispensation to be granted under regulation 2.17. Firms should apply by emailing email@example.com. If granted, the firm will have up to 90 days from the date when the firm becomes ineligible ie, 1 January 2021 to regularise the position. The period of dispensation cannot be extended.
Although the UK has unilaterally recognised the EU states for adequacy and equivalence for audit, this equivalence currently does not apply for working papers owing to the absence of reciprocity.
The following advice has been issued by the FRC and BEIS:
Will the effect of rules in the Audit Directive on group audits change as a result of EU Exit?
Conduct of group audits
The effect of rules in the Audit Directive on group audits will not change as a result of EU Exit. The rules do not differentiate between a group auditor considering the audit of a subsidiary in the UK, the EU, in an equivalent third country or in a non-equivalent third country. Article 27 of the Audit Directive provides that all subsidiary audits must be evaluated and reviewed by the group auditor and a group auditor must obtain and assemble paperwork on audits of subsidiaries during the group audit. Meanwhile Article 23(5) subparagraph 1 makes sure that confidentiality obligations in Member State law do not impede a subsidiary auditor in transferring working papers to a group auditor for this purpose, wherever the holding company is based.
The same framework is maintained in the UK (under paragraphs 9(2) and 15 of Schedule 1 to SATCAR 2016) for the period immediately after the UK's departure from the EU. (Amendments to the latter of these two paragraphs in SATCAR 2019 on account of EU Exit are only to maintain their existing effect in the context of amended definitions elsewhere).
As a result, BEIS would not expect any additional review or evaluation work to be needed for EU or UK group audits after the end of the Transition Period.
Inspection of group audits by competent authority
Similarly to the position set out above, the EU and UK's rules on the inspection of group audits do not differentiate between a group auditor auditing a subsidiary in a Member State, a third country with adequacy status, or another third country. However, under Article 47 of the Audit Directive, a third country competent authority must have adequacy status, and agree reciprocal working arrangements with relevant EU competent authorities, to obtain paperwork on an audit by an EU statutory auditor of an EU subsidiary. The Financial Reporting Council will be affected in this way after the end of the Transition Period when inspecting audits of consolidated accounts in the UK if it requires additional information on the subsidiary audit that the group auditor doesn’t hold. This would prevent the subsidiary auditor in the EU or their competent authority providing FRC with the information. Although the UK has granted adequacy status to EU Member State competent authorities, until the UK is granted adequacy status by the European Commission and reciprocal working arrangements have been agreed, transfers of working papers will not be possible between the EU member states and the UK.
The effect may create difficulties if an EU or UK group auditor has not assembled sufficient paperwork themselves during the audit. However, sufficiency of documented evidence has always been a necessary requirement in the preparation of an audit file.