Documents considered by the Committee on 31 January 2018 Contents

4Statutory audit

Committee’s assessment	Politically important
Committee’s decision	Not cleared from scrutiny; further information requested; drawn to the attention of the Committee for Exiting the European Union, the Business, Energy and Industrial Strategy and the Treasury Committees
Document details	Report from the Commission to the Council, the European Central Bank, the European Systemic Risk Board and the European Parliament on monitoring developments in the EU market for providing statutory audit services to public-interest entities pursuant to Article 27 of Regulation (EU) 537/2014
Legal base	Non-legislative; Article 27 of the EU Audit Regulation requires each National Competent Authority (NCA) to report on the statutory audit market in its jurisdiction.
Department	Business, Energy and Industrial Strategy
Document Number	(39066), 12536/17, COM (17) 464

Summary and Committee’s conclusions

4.1This chapter considers the implications of EU exit for UK statutory auditors and audit entities. The document that is under scrutiny is a European Commission report24 which brings together information submitted by National Competent Authorities for statutory audit in each of the EU Member States, in order to assess the market for providing statutory audit services to “Public Interest Entities” (“PIEs”).25 The Commission’s report is relatively insignificant: it identifies the most common recurring issues with the quality of audit work, and concludes that none represents a major risk to the provision of audits or to financial stability.

4.2In an Explanatory Memorandum submitted on 16 October 2017,26 the Parliamentary Under Secretary of State for Small Business (Margot James MP) stated that the European Commission’s reports provided a useful indication of any developing risks to audit quality for Public Interest Entities in Europe but also noted that, as the first report of its kind, on its own, and without any indication of developing statistical trends, it provided limited insight. More generally, the Minister noted that the UK is a key location for the provision of statutory audit services in the European Union and worldwide, and that the Commission’s report found that more than half of the revenues generated from the audits of Public Interest Entities in the EU are generated in the UK. However, the Government provided no analysis of the implications of EU exit for the sector.

4.3We have therefore sought in this chapter to draw on other available sources of information to assess the implications of EU exit for statutory audit. In summary, an equivalence and an adequacy decision from the Commission would be needed for the activities of UK audit firms to avoid being disrupted, although further clarification is needed regarding the extent to which these decisions would effectively maintain the status quo in its entirety. In the absence of these approvals, a range of difficulties would arise which would cause problems in a number of specific market situations (group audits, pan-European partnerships, listing of securities for EU companies on UK regulated markets), which would increase costs for UK auditors as well as the companies paying for their services. However, while these developments would damage the sector, features of audit regulation and capital markets mean that the extent to which the EU could force large amounts of UK-based audit activity to relocate to the EU27 is limited.

4.4We thank the Government for its Explanatory Memorandum. The Committee notes the European Commission’s finding that the UK has the largest audit sector in the EU, which accounts for approximately half (€15.3bn) of all turnover of audit firms auditing Public Interest Entities (PIEs) in 25 Member States, and generates around 29% of all fees from statutory audits within in the EU (€3.17bn).27 It is regrettable therefore that the Government’s Explanatory Memorandum provides no consideration of the implications of EU exit for UK auditors and audit firms.

4.5The Committee considers that the Government’s sectoral assessment28 understates the amount of UK-EU cross-border economic activity29 that takes place in statutory audit, as well as the negative implications for UK auditors of an exit which does not ensure that mutual recognition arrangements are in place at the moment of withdrawal. Consequences of this scenario would include:

non-recognition of UK qualified auditors who did not exercise Treaty freedom of establishment rights prior to the UK’s exit from the EU without undergoing full re-qualification procedures;
UK audits not being recognised as legally valid in EU Member States, requiring an additional level of audit in some cases;
UK audit firms having to register as third country operators with individual Member States and being subject to additional oversight by their regulators;
barriers to transfer of documents across jurisdictions where quality assurance is concerned, and related issues (investigations and sanctions); and
in the absence of equivalence and adequacy decisions from the European Commission, UK audit firms would have to establish bilateral arrangements with individual Member States, which would require a major investment of administrative resource.

4.6The sum effect of these impacts would be to increase the cost of providing statutory audits for UK audit firms as well as their customers (including EU businesses).

4.7Market situations in which difficulties would arise in the absence of adequacy and equivalence decisions include: (i) group audits for consolidated accounts, the provision of which is substantially facilitated by the EU framework; (ii) EU registered companies being unable to list securities on UK financial markets, if EU27 audits were not accepted in the UK; and (iii) pan-European partnerships (such as those of EY and Deloitte) that include UK audit firms having to be restructured in line with EU ownership and control requirements. Ernst and Young (EY) has stated that “failure to secure a similar regime [to the status quo] could threaten the UK’s pre-eminent role in accounting and audit in [the] EU.”30

4.8Despite the damage to the UK audit sector that an EU exit without adequacy and equivalence decisions would cause (both with regard to mutually recognised audit qualifications and, separately, audit regulators and underlying regulations), with consequences for the UK audit sector, we observe that the EU’s ability to require UK audit activity to relocate to the EU27 is generally weaker than in some other PBS sectors (e.g. legal and financial services). This is because (i) national regulators require local audits to be signed off by local auditors, meaning that there is a de facto limit on the proportion of UK and EU audit that can be done overseas, and (ii) as long as UK capital markets remain the preferred destination for listings and EU firms continue to list securities on them, group consolidations for UK listed companies will continue to take place here.31 We also note the strategic importance of effective audit for the integrity, stability and efficient functioning of capital markets. The UK and EU27 therefore have a mutual interest in negotiating an orderly transition and future relationship with respect to audit.

4.9To enable the Committee to conclude its scrutiny of this issue, we ask the Government to clarify:

how a shift from current UK audit activities on the basis of the status quo (EU membership) to the alternative legal basis that would be provided by Commission equivalence and adequacy decisions would affect UK audit activity, specifically in relation to (i) group audits; (ii) ownership and control rules and pan-European partnerships; and (iii) the ability of UK-qualified auditors to have their qualifications recognised and to practice in EU Member States. In each case, what differences from the status quo would arise and how feasible would it be for UK audit firms to work around these?
which UK audit firms are currently part of pan-European partnerships; whether the Government has engaged with these firms about the possibility of their having to be restructured, so that the pan-European partnerships can conform with EU ownership and control rules; and whether, in the Government’s assessment, this would substantially harm these UK audit firms, or whether they could undertake the necessary restructuring without excessive difficulty;
whether, under the terms of the Joint Report on phase 1 of negotiations32 and the Commission’s recommendation on transitional arrangements,33 the UK would continue to benefit from the intra-EU status quo for statutory audit in all respects, including recognition of UK audit qualifications and regulators/regulation, until the end of the transition period;
whether, if mutual recognition on audit matters cannot be agreed as part of Article 50 negotiations, the Government would have to wait until any transition period ends before it could apply for equivalence and adequacy decisions from the Commission, or whether it would be able to do so before then (please provide the basis for this assessment);
if mutual recognition arrangements are not concluded before the UK exits the Single Market, whether the Government would contemplate accepting EU27 audits on a unilateral basis in order to facilitate EU companies continuing to list on UK markets, or whether it would make their recognition strictly conditional on reciprocity (i.e. the EU recognising UK audits); and
whether the Government is talking to the Financial Reporting Council and the UK profession about an outcome that is in the UK public interest, and what approach they advocate.

4.10We ask the Government to respond to the Committee’s questions by 7 March 2017. In the meantime, we retain the proposal under scrutiny. We draw this chapter to the attention of the Committee for Exiting the European Union, the Business, Energy and Industrial Strategy Committee, and the Treasury Committee.

Full details of the documents

Report from the Commission to the Council, the European Central Bank, the European Systemic Risk Board and the European Parliament on monitoring developments in the EU market for providing statutory audit services to public-interest entities pursuant to Article 27 of Regulation (EU) 537/2014: (39066), 12536/17, COM (17) 464.

Background

4.11A statutory audit is a legally required review of financial records. The role of a statutory audit is to certify the financial statements of companies or public entities. An audit provides stakeholders such as investors and shareholders with an opinion on the accuracy of companies’ accounts. As a result, statutory audits contribute to the orderly functioning of markets by improving the confidence in the integrity of financial statements.

4.12The current rules consist of:

The EU Statutory Audit Directive, recently amended by Directive (EU) 2014/56,34 which sets out the framework for all statutory audits, strengthens public oversight of the audit profession and improves cooperation between competent authorities in the EU. A consolidated version is available.
The EU Statutory Audit Regulation35 which specifies requirements for statutory audits of public interest entities (PIEs), such as listed companies, banks and insurance undertakings.

4.13In the UK, the Financial Reporting Council (FRC) is responsible for the public oversight of statutory auditors, as required under EU law, and is recognised as an appropriate regulatory authority throughout the EU.

4.14As the UK is currently an EU Member State, it automatically benefits from those aspects of the EU audit regulatory framework which reduce non-tariff barriers to trade and facilitate intra-EU market access. Under this regime:

the UK FRC is recognised as an appropriate regulatory authority throughout the EU;
audits performed by an FRC accredited auditor in the UK are accepted as legally valid within the EU and vice-versa, without the need for the additional oversight to which third country auditors (that lack recognition) are subject;
UK auditors are enabled to have some involvement in audits for EU entities, most crucially when consolidating group-wide audits within the UK, during which ‘local auditors’ in other EU Member States are effectively under UK auditor control; and
UK auditors are able to share documents with EU auditors, facilitating cross-border activity.

4.15The Statutory Audit Directive means that, in principle, audit qualifications attained in one Member State are recognised across all EU Member States, however, Member States have their own requirements for statutory audits and typically require examination of those areas before auditors from other EU Member States can practice.36

Third country provisions

4.16The Statutory Audit Directive explains how the EU audit framework applies to auditors in third countries.

4.17Article 27 addresses the statutory audit of consolidated accounts, including evaluation by the group auditor of work performed by third country auditors and the obligations with respect to quality assurance reviews carried out by the competent authorities.

4.18Chapter XI of the EU Statutory Audit Directive covers the treatment of third country auditors, audit firms (the latter being the most relevant) and audit regimes as follows:

Oversight of registered third country audit firms—Article 45 requires that Member States register every third country audit entity that provides an audit report concerning the annual or consolidated accounts of a company incorporated outside the EU which is listed on a Member State regulated market. Audit reports issued by third country auditors which are not registered have no legal effect in the Member State. Unlike EU auditors and audit firms, registered third country auditors and audit firms are automatically subject to the Member State’s oversight, quality assurance and investigation and sanctions regime.
Equivalence decisions allowing derogation of third country requirements—Article 46 establishes the procedure for derogation of third country requirements where there is an equivalence decision by the EC in cooperation with Member States. A Member State may assess a third country for equivalence as long as the EC has not taken any prior decision. The EU has adopted several equivalence decisions37 recognising that the public supervision of auditors in certain non-EU countries meets the same requirements that are in force in the EU through the audit directive.
Adequacy decision on working arrangements—Article 47 sets the criteria for an adequacy decision by the EC to enable cooperation with a third country competent authority through working arrangements to be agreed on a reciprocal basis. It sets out the basis for cooperation with competent authorities from third countries, notably in relation to the transfer of audit working papers. The EU has also adopted several decisions recognising that the audit supervision authority of certain non-EU countries is adequate to exchange audit working papers with relevant authorities in EU countries.
Requirements for third country audit firms to register—Article 45 sets out the requirements which must be met for a third country audit entity to register. These encompass equivalent requirements to those set out in the EU legislation with regard to: ownership and control conditions for the audit entity; education, training and experience requirements for the individual auditors; and auditing standards and transparency reporting by the auditing entity.
Provisions on approval, ownership and control—Article 3 addresses approval, ownership and management rules for statutory auditors and audit firms. Member States have to designate competent authorities for the approval of statutory auditors and audit firms operating in their own and in other Member States. Audit firms can only be approved where they satisfy the following conditions:
- the individuals carrying out statutory audit on behalf of the audit firm are approved in the Member State concerned—i.e. are ‘locally qualified’ (either by having completed the education and training in that Member State or having gained recognition through an aptitude test after home country qualification);
- the majority of voting rights in the firm are owned by audit firms and auditors which are approved in any Member State or by individuals who satisfy the good repute and education and experience conditions in the Directive to become approved as a statutory auditor.
A majority of members on the management board of the entity, up to a maximum of 75%, must be approved on the same basis.
There is the potential for Member States to set down other provisions on voting rights for the statutory audit of cooperatives, savings banks or similar and to go beyond the maximum of 75% on the management board (but not materially relevant for the points under consideration).

Exit effects

4.19Effects of EU exit, without adequacy and equivalence decisions in place, include:

UK qualified auditors no longer automatically benefit from the possibility to practice in the EU after passing an aptitude test or completing an adaptation period;
UK audits and audit firms having to operate in the absence of equivalence and adequacy decisions from the Commission; even when administrative procedures are underway, these decisions can take a significant period of time;
UK audits no longer being legally valid within the EU (and vice-versa);
UK audits being subject to oversight and quality assurance regimes of regulators in the relevant Member States, increasing costs;
UK audit firms no longer being able to conduct group audits with a local EU auditor effectively operating under their control;
barriers to the sharing of documentation with UK auditors, for the purposes of, for example, group audits;
in order to allow business to continue, UK auditors and audit firms having to register in EU Member States and vice-versa, with all parties being subject to additional regulatory and bureaucratic burden;
a shift of resource into navigating the sudden proliferation of new regulatory requirements, which might have an impact on the quality of audit work conducted;
EU companies no longer being able to list on the UK capital markets (although this is something the UK could address unilaterally);
pan-European partnerships which include UK audit firms would have to restructure to accommodate EU ownership and control requirements; and
potential loss of some international audit activity to the EU27, if UK headquartered companies (particularly those not listed on UK capital markets) relocated headquarters to the EU, or audit companies (including pan-European partnerships) relocated headquarters / some group activity to the EU; however, UK regulatory requirements would limit the extent of any loss of activity in this area, particularly where firms continued to list on UK capital markets.

4.20An adequacy decision from the Commission with respect to the UK’s data protection regime38 would also be necessary for the sharing of data with other European jurisdictions, however it is important to note that this is not in itself sufficient for UK auditors to process audit documentation: although an adequacy decision on data protection would allow UK auditors to continue to receive data from EU jurisdictions, a separate adequacy decision under the Statutory Audit Directive would be necessary in the specific context of audit for UK auditors to receive certain types of audit documentation and to use that documentation in their work.

Market situations affected by EU exit

4.21Three specific situations are potentially affected in the context of EU exit:

Audits of EU registered companies with securities trading on UK regulated markets—Over 70 EU registered companies, which have audits done within an EU27 Member State, currently have listings on UK regulated markets. Listings are not permitted without legally valid audits. For these companies to continue to list in the UK, their local EU audits will have to be recognised by the UK, but when the UK leaves the EU this will no longer automatically be the case. In principle, the UK could unilaterally resolve the issue by continuing to recognise EU27 audits. This would appear to be the most likely outcome, as the consequences of no longer allowing 70 EU companies to list on UK regulated securities markets would clearly be detrimental to UK capital markets. However, if the EU did not reciprocate by offering recognition, and the issue became politicised as part of wider trade negotiations, the UK could require that EU audits be subject to additional UK oversight and monitoring, before being recognised. This would increase costs for all parties, and make the UK in particular a less attractive location for certain types of audit activity.
Working arrangements for group and cross-border audits—As shown by the European Commission’s report, the UK currently leads the EU in carrying out the consolidation of EU-wide audits. If the UK ceased to be part of the EU regime, without securing equivalence and adequacy decisions from the Commission, this would raise a wide range of difficulties with respect to the carrying out of this work. Difficulties would arise in relation to access to audit working papers and other documents. UK auditors seeking to conduct group audits would also no longer be able to do so on the current basis, whereby UK auditors can undertake audits and sign audit reports in EU Member States on the basis that the signing partner is locally qualified. UK auditors and audit firms would have to register in the EU and operate under oversight by regulators in the host country. UK audits of EU27 businesses would have to be examined and approved by EU authorities. All of these changes would increase the cost of providing the service in the UK (including for EU companies that want to list securities on UK markets).
Pan-European partnerships—The UK currently leads the EU as the destination in which audit practices are registered as pan-European partnerships. If, outside the EU regime, the UK regime does not retain its current equivalence and adequacy, companies would have to restructure as UK audit authorities, entities and auditors would no longer be recognised, and UK auditors would cease to qualify as EU auditors for the purpose of the EU auditor ownership rules. UK authorities would no longer be able to register audit firms with pan-European ownership. Existing pan-EU partnerships would have to be restructured to enable them to operate in line with EU law.

Stakeholder views

4.22The Government’s analysis of the implications of EU exit for audit, provided in full at the end of this chapter, notes the EU audit framework “facilitates cross border supply of audit services by firms” and “provides for some free movement of EU auditors”,39 but states that, in practice, “cross-border supply of audit services is quite rare.”40

4.23UK-based audit organisations are significantly more concerned about the possible implications of EU exit than the Government’s sectoral analysis would suggest is warranted, although there is some variation among organisations.

4.24The European Contact Group (ECG) which is an informal regulatory and policy working group of six large audit networks in the EU (BDO, Deloitte, EY, Grant Thornton, KPMG and PwC), has published an FAQ document on EU Audit Legislation.41 At the end of the briefing, it identifies the following key implications of the UK leaving the European Union for statutory auditors:

When the UK has formally exited the European Union, the Audit Directive and Regulation will in principle no longer apply;
UK qualified auditors would therefore in principle no longer automatically benefit from the possibility to practice in the EU after passing an aptitude test or completing an adaptation period;
Similarly, EU qualified auditors would in principle no longer automatically benefit from the possibility to practice in the UK after passing an aptitude test or completing an adaptation period; and
UK auditors of UK incorporated entities listed on a regulated market in the EU would have to register as third country auditors and be subject to the oversight, quality assurance and investigations and penalties regime of the EU Member State of the regulated market, except if the UK regime has been declared equivalent to the EU regime by a decision issued by the European Commission.

4.25The ECG qualifies its concern about the possible loss of equivalence of the UK regime, noting that it would expect that the UK regime would be considered to be equivalent and that, subject to reciprocity, UK auditors of UK incorporated entities listed on regulated markets in the EU might therefore be exempted from the oversight, quality assurance and investigations and penalties regime of the EU Member State of the relevant regulated market.

4.26Other sector stakeholders, including Ernst and Young,42 the Professional and Business Services Council,43 and the Institute of Chartered Accountants in England and Wales (ICAEW),44 provided the House of Lords EU Committee with written evidence which relates to the implications of Brexit for audit, as part of a wider inquiry into the Brexit and future UK-EU trade in non-financial services.45

4.27The Professional and Business Services Council states that “it is most important that leaving the single market does not result in currently recognised qualifications becoming unrecognised” and that the recognition of the FRC as an appropriate regulatory authority throughout the EU “allows auditors that it regulates some involvement in audits for overseas entities and reduces barriers to trade”.46 However, the PBSC also notes in its submission that each Member State has its own requirements for statutory audits, and that barriers to the provision of audit services across EU borders remain.

4.28Ernst and Young (EY) stated that the equivalence of the regulatory framework overseen by the FRC and its equivalence with other EU Member States “reduces barriers and costs to trade.”47 EY states that, outside the EU, retaining the benefits of the current regime would be a matter for negotiation, and that “failure to secure a similar regime could threaten the UK’s pre-eminent role in accounting and audit in [the] EU.”48

The UK-EU Joint report49

4.29The UK-EU Joint report contains the following paragraph (32) on the recognition of professional qualifications, which effectively states that the rights of statutory auditors who exercise rights relating to the recognition of professional qualifications in the UK or any other EU Member State prior to exit day will have those rights protected:

“Decisions on recognition of qualifications granted to persons covered by the scope of the Withdrawal Agreement before the specified date in the host State and, for frontier workers, the State of work (either the UK or an EU27 Member State) under Title III of Directive 2005/36/EC (recognition of professional qualifications where the person concerned was exercising the freedom of establishment), Article 10 of Directive 98/5/EC (lawyers who gained admission to the host State profession and are allowed to practise under the host State title alongside their home State title) and Article 14 of Directive 2006/43/EC (approved statutory auditors) will be grandfathered. Recognition procedures under these Directives that are ongoing on the specified date, in respect of the persons covered, will be completed under Union law and will be grandfathered.”

The Commission’s report50

4.30Article 27 of the EU Audit Regulation requires that each National Competent Authority (NCA) should regularly monitor and report to the Commission on the statutory audit market in its jurisdiction on risks arising in its audit market, market concentration levels, the performance of audit committees of PIEs in that jurisdiction, and a wide range of other factors. Using the information provided the Commission must assemble an overall report in cooperation with the Committee of European Audit Oversight Bodies (CEAOB).

4.31The Commission’s report, which brings together information submitted by the National Competent Authorities for statutory audit in each of the EU Member States, concludes that:

in 15 of 21 Member States that provided appropriate data the “Big 4” audit firms (Deloitte, EY, KPMG and PWC) hold more than an 80% share of the market by turnover for the supply of statutory audit services to Public Interest Entities;
audit inspections in Member States identified the following most common recurring issues with the quality of audit work:
- deficiencies in internal quality control by firms;
- failure to document some aspects of the audit engagement; and,
- lack of sufficient evidence of having carried out a full audit assessment.

4.32The report does not conclude that any of these recurring issues represent a major risk to the provision of audits or to financial stability. It suggests that the next report should monitor whether any of these recurring issues risks becoming a structural feature of the market.

The Minister’s Explanatory Memorandum of 16 October 201751

4.33In the policy implications of her Explanatory Memorandum, the Parliamentary Under Secretary of State for Small Business (Margot James MP) states that the European Commission’s reports provide a useful indication of any developing risks to audit quality for Public Interest Entities in Europe and any threats to the supply in the market for audits of PIEs of appropriate quality; however, the Minister also notes that, as the first report of its kind, on its own, and without any indication of developing statistical trends, it provides only limited insight.

4.34The Minister provides some information about the UK’s implementation of the EU Audit Directive and Regulation, noting that the Competition and Markets Authority completed an investigation into the supply of statutory audit services to UK companies in the FTSE 100 and 250 indexes, which resulted in conclusions which are reflected in the UK’s implementation of the EU audit regulatory framework. The Minister also observes that the Government and the Financial Reporting Council keep the UK’s audit regulatory framework under review for any indication that it is failing to fulfil its intended objective of securing high quality audits, particularly for PIEs.

4.35More generally, the Minister observes that that the UK is a key location for the provision of statutory audit services in the European Union and worldwide because it is a global hub for financial services, professional business services, the holding companies of multinational groups and for the financial markets on which they raise capital. The Commission’s report finds that more than half of the revenues generated from the audits of Public Interest Entities in the EU are generated in the UK.

4.36No consideration is provided of the implications of the UK’s decision to leave the European Union, and the Government’s intention to leave the Single Market, for UK-based providers of statutory audit services either domestically or elsewhere in the EU.

The Government’s sectoral analysis52

4.37By way of background, the Government’s sectoral report on the Professional Business Services sector that describes the EU audit framework and its relevance to UK auditors is reproduced below in its entirety:

Audit Directive (2006/43/EC) (amended by Directive 2014/56/EU) and Regulation (537/2014)

“The UK’s audit regulatory framework has developed out of a series of Directives to harmonise the regulation of professional auditors and audit firms and to impose a considerable body of EU regulation: on auditor appointment; on the maintenance of relations between the auditor and the client’s senior management; on the application of technical standards on audit work; on comparable codes to maintain auditor independence; and on the regulation of auditors through inspections, investigation and enforcement.

“The audit framework provides for some free movement of EU auditors with provision for aptitude tests or adaptation periods by Member State authorities to enable mutual recognition of qualifications. The Audit Directive also makes some provision for the audit of non-EU businesses that are listed on UK capital markets. This framework has developed over time with the objective of protecting investors. The EU framework now recognises that a different approach is needed in respect of UK and other EU firms auditing overseas.

“Cross-border supply of audit services is quite rare because of the significant economic regulatory concerns and the resulting controls in most countries, which restrict supply. In most large economies, auditors are established and regulated within their client’s jurisdiction, though the Directive now facilitates cross border supply of audit services by firms, subject to certain regulatory preconditions. In addition to mutual recognition of qualifications for those permitted to sign audit reports, ownership and management of an audit firm are also subject to requirements that the majority of owners and managers must hold mutually recognised qualifications or, for firms, registrations. Within the confines of this framework, mutual recognition allows audit firms to develop ownership structures across borders.

“The framework also prescribes how national audit regulators (competent authorities) should cooperate internationally, both within and outside the EU, and sets out how auditors of businesses listed on the main capital markets should be regulated if the business is established overseas (this framework primarily affects UK auditors of non-EU businesses listed on UK markets).

“The structure of the UK accountancy sector means that many aspects of this framework indirectly affect almost all services offered by almost all accountancy firms. This is partly because of necessary regulation as to which other services a business may procure from its auditor, and how it can then ensure the auditor’s continued independence. In addition in the UK, the regulatory oversight of audit firms is the starting point for the UK’s non-statutory regulatory framework for wider accountancy services.”53

Previous Committee Reports

None on this document, but see our earlier Reports on Regulation 2014/537 (EU) on specific requirements regarding statutory audit of public-interest entities and Directive 2014/56 (EU) on statutory audits of annual accounts and consolidated accounts: Nineteenth Report HC 83–xviii (2013–14), chapter 1 (23 October 2013); Eighth Report HC 83–xviii (2013–14), chapter 8 (3 July 2013); Fifty-fourth Report HC 428–xlix (2011–12), chapter 3 (1 February 2012).

24 European Commission, Report from the Commission to the Council, the European Central Bank, the European Systemic Risk Board and the European Parliament on monitoring developments in the EU market for providing statutory audit services to public-interest entities pursuant to Article 27 of Regulation (EU) 537/2014 12536/17.

25 Auditing banks and insurers, building societies and companies with securities admitted to trading on a regulated market.

26 Explanatory Memorandum from the Minister, BEIS, to the Chairman of the European Scrutiny Committee (16 October 2017).

27 Report from the Commission to the Council, the European Central Bank, the European Systemic Risk Board and the European Parliament on monitoring developments in the EU market for providing statutory audit services to public-interest entities 12536/17.

28 Sectoral Report—Professional and Business Services (Published 21 December 2017).

29 The Government’s assessment (see the final section of this report) states that “Cross-border supply of audit services is quite rare because of the significant economic regulatory concerns and the resulting controls in most countries, which restrict supply.” While regulatory requirements undoubtedly mean that most statutory audits are conducted by local auditors and audit firms, group audits of consolidated accounts are cross-border in character, although not purely so, as local auditors are involved, and work under oversight of the group auditor. Informal industry estimates suggest that the auditor conducting the group-wide consolidation typically takes at least 15% of total revenues for a group audit.

30 Written evidence to the House of Lords European Union Committee, Ernst and Young (October 2016).

31 DTR 4.1, a Financial Conduct Authority rule that implements part of the EU Transparency Obligations Directive, and is made under the powers granted to the FCA under the Financial Services and Markets Act 2000, requires parent companies to prepare consolidated financial statements. This would continue to be the case under the Great Withdrawal Bill framework unless and until the FCA changed the law (or the government took the power back from the FCA). It is important to note that the EU27 Member State of incorporation will also require consolidated accounts as a matter of company (rather than securities) law, because it is a condition of the Accounting Directive.

32 Joint report from the negotiators of the European Union and the United Kingdom Government on progress during phase 1 of negotiations under Article 50 TEU on the United Kingdom’s orderly withdrawal from the European Union TF50 (2017) 19—Commission to EU 27 (8 December 2017).

33 Annex to the Recommendation for a Council Decision supplementing the Council Decision of 22 May 2017 authorising the opening of negotiations with the United Kingdom of Great Britain and Northern Ireland for an agreement setting out the arrangements for its withdrawal from the European Union COM (17) 830 final (20 December 2017).

34 The consolidated text of Directive 2006/43/EC as amended by subsequent legal acts including Directive 2014/56/EU is available here.

35 Regulation 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC.

36 Freshfields Bruckhaus Deringer, The legal impact of Brexit on the UK-based financial services sector (17 January 2017).

37 European Commission, Implementing and delegated acts on Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts—Equivalence Decisions (accessed 22 January 2018)

38 European Commission, Adequacy of the protection of personal data in non-EU countries (accessed 24 Jan 2018)

39 In a letter to the Committee on 19 October 2013, the Minister involved in negotiating the proposal (Jo Swinson) wrote that the Regulation and Directive provided for “a pan-European ‘passport’ for statutory audit firms to allow them to provide statutory audits in Member States other than the Member State in which they have been approved”.

40 Sectoral Report—Professional and Business Services (Published 21 December 2017).

41 European Contact Group, European Union Audit Legislation Frequently Asked Questions (12 April 2017).

42 Written evidence, Ernst and Young (October 2016).

43 Written evidence, the Professional and Business Services Council (October 2016).

44 Written evidence, The Institute of Chartered Accountants in England and Wales (ICAEW) (October 2016).

45 House of Lords, Brexit: trade in non-financial services (22 March 2017).

46 Written evidence, the Professional and Business Services Council (October 2016).

47 Written evidence, Ernst and Young (October 2016).

48 Written evidence, Ernst and Young (October 2016).

49 Joint report from the negotiators of the European Union and the United Kingdom Government on progress during phase 1 of negotiations under Article 50 TEU on the United Kingdom’s orderly withdrawal from the European Union TF50 (2017) 19—Commission to EU 27 (8 December 2017).

50 European Commission, Report from the Commission to the Council, the European Central Bank, the European Systemic Risk Board and the European Parliament on monitoring developments in the EU market for providing statutory audit services to public-interest entities pursuant to Article 27 of Regulation (EU) 537/2014 12536/17.

51 Explanatory Memorandum from the Minister, BEIS, to the Chairman of the European Scrutiny Committee (16 October 2017).

52 Department for Exiting the European Union, Professional and Business Services Sector Report (published December 21).

53 Department for Exiting the European Union, Professional and Business Services Sector Report (published December 21).

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2 February 2018