Introduction

The Financial Reporting Council has issued some guidance on the Implementation of the 2016 Auditing and Ethical Standards. The appendix to this guidance explains the changes to the FRC Ethical Standard (ES) that will be made if the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2018 comes into effect which would happen at the point of a no-deal Brexit. A further revision to the FRC Ethical Standard was issued in December 2019, to take effect for periods commencing after 15 March 2020. Similar changes might be needed to this standard in the evener of a no-deal Brexit at the end of the transitional period on 31 December 2020.

The changes will apply to the audit of financial periods commencing on or after that time.

Summary of independence changes

Those areas in the FRC ES that will be revised to reflect the changes to the law that will be made in the event of leaving with no withdrawal agreement or transition period have been summarised by the FRC as:

• The change in the definition of a PIE to exclude entities that are only PIEs because they have securities admitted to trading only on EEA regulated markets and not on UK regulated markets;
• Provision of non-audit services to subsidiaries of audited PIEs when the subsidiary is in a third country;
• Non-audit services required by EU law will no longer be exempt for the purposes of the 70 per cent non-audit services fee cap’
• References to national and EU law, in many cases will become a reference to ‘retained EU law’ (which is part of UK law);
• The change of terminology from “controlled undertaking” to “subsidiary undertaking” in Articles 4 and 5; “associated persons” in Article 6; and “relevant legislation” in Articles 7 and 8.

Provision of non-audit services (NAS) to international groups

The principal issue needing immediate attention is that the prohibitions on the provision of certain NAS in paragraph 5.167R of the ES will apply to all components of a PIE group audit regardless of where in the world that component is located, where the audit of that component is undertaken by a member of the auditor’s network firm.

In the case of an entity with a year-end shortly after Exit Day, the auditor must therefore ensure that any prohibited non-audit services provided by its network firms to components of a group audit located outside of the European Union, are terminated before the start of the following accounting period.

Where this is not possible to achieve, the FRC is drawing attention to ISA (UK) 700 paragraph 45R-1. This requires the auditor to provide a declaration in their audit report that they have not breached NAS requirements.

Where those requirements have been breached, but where the auditor believes that an ‘objective, reasonable and informed third party’ would not conclude that the auditor’s independence had been compromised, then the auditor should issue the auditor’s report, disclosing within it:

• the nature of the breach;
• confirming the auditor’s assessment that their independence had not been compromised; and
• stating what had been done to address any risks arising impacting on the independence of the auditor.

Before the auditor’s report is signed, this should be discussed and agreed with the audit committee of the entity concerned.

Further information

ICAEW has included a number of items of Brexit-related guidance for members on its Brexit hub. In relation to audit, ICAEW has published a series of Brexit and audit guides. The guides are intended to help auditors deal with current Brexit-related uncertainties. They are written from an SME perspective but will be relevant to all audits.