The regulation of audit after the completion of Brexit may need to be recognised as equivalent by the EU in order for UK firms’ work to be accepted, the Financial Reporting Council (FRC) has admitted
In its annual open meeting, the regulator expressed concerns that without equivalence, UK firms could be put at a disadvantage, with their audits not granted the same recognition as their European counterparts.
In the transcript of its open meeting, the FRC said: ‘After leaving the EU, depending on the withdrawal negotiations and any agreement on our future relationship with the EU, UK audit firms may be deemed third-country audit firms. It may be necessary for the system of regulatory oversight and quality assurance in the UK, currently operated by the FRC, to be recognised as equivalent by the EU so that UK firms’ audit reports are accepted by securities regulators throughout the EU post-Brexit. The UK may also have to deem the EU equivalent.’
On the use of technology in audits, it was noted that the use of data analytics and artificial intelligence are not widespread in the UK, but the UK is at the forefront of their usage and the pace of adoption is quickening.
The FRC said it had been ‘working with the firms who are developing their technologies’ and some of the firms are now beginning to use data analytics in, for example, revenue testing and within the context of the existing standards.
‘This tells us that the standards are not presenting an obstacle,’ it said. ‘Yet although the standards recognise that computer technology exists, perhaps they do not do enough to encourage the use of more data analytic, big data and artificial intelligence techniques’.
On auditor independence and the Ethical Standard, introduced in 2016, there is already discussion about bolstering the standard, particularly after Brexit.
The FRC said: ‘At the time, last year, we felt European institutions, including the European Parliament, had debated these things in the public interest and reached a certain conclusion, and we thought that we should be broadly in line with that. I think that if we review the standard in a couple of years’ time, outside the EU, we should think about whether we do need to go further.’
Report by Calum Fuller
