Draft Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) regulations 2018

Nigel Mills Excerpts

Thursday 10th January 2019 General Committees

[Nigel Mills (Amber Valley) (Con)]

I have just a few comments and questions about what we are doing here. To start with a slightly trivial one, the exemptions from having a statutory audit are set by EU regulation, and are based on thresholds for turnover and balance sheet size that are set in euros and then, every so often, are converted into sterling. I think the current ones we use set a turnover size of £10.2 million and a balance sheet size of £5.1 million. As we implement these regulations, would it not make sense to pick a nice round turnover and balance sheet number that can stay the same until we choose to change it, rather than having a slightly odd un-round number because of a conversion from euros?

I have two more substantive questions. First, while we obviously have some important ongoing discussions about how we reform our audit regulations and industry to make sure they are meeting the needs of the various stakeholders, our audit industry and professional services are well regarded around the world for the high quality of their work, their training, their standards and their regulation. They form quite an important export market. Can the Minister assure us that with all the stuff that we are carrying out on mutual recognition, we are aware that this is quite an important export for us? Ensuring that our UK businesses and our UK trading staff will continue to work in Europe and around the world is equally as important as ensuring that EU or EEA firms and others can work in the UK.

My second point is on what happens in the unlikely event of a no-deal exit at the end of March. There are many companies listed on our stock exchanges that are not based here and are therefore audited by non-UK audit firms. It is okay to have the powers to authorise non-UK firms to carry out these audits, but are we sure that in the event that an audit needs signing off and documents need filing in April, or pretty quickly after we leave, audit firms that are not UK-based will have been authorised so that those audited accounts are valid for listing purposes? Will we effectively just grandfather those approvals until the end of 2020, regardless of there being a deal or not, or will the FRC have to authorise a whole load of audit firms very quickly to ensure that we can continue to have firms meeting their listing requirements?

There have been various concerns about the ability of the FRC and its resourcing to meet all the very demanding roles that it already has. Is the Minister sure that it can at some speed meet these new demanding requirements that we have? Just for safety, I should declare that I am still a member of the Institute of Chartered Accountants in England and Wales. I used to work for audit firms, and I think I have a very small pension from one somewhere.

[Kelly Tolhurst]

I will try to answer as many of the questions that have been put by hon. Members as I can. The hon. Member for Sefton Central referred to the people behind me as thinking that I was not speaking the truth. I want to clarify my point: as a member of this Government, I am committed to getting to a position where the UK has a deal with the European Union. However, any responsible Government, as we are, would be preparing for a no-deal scenario. The regulations before us will put us in a position where UK business confidence remains. We have confidence in the UK markets and are acting responsibly to ensure that in the event of no deal, we are in a situation where the law works correctly.

I would like to go back to the point made by my right hon. Friend the Member for Welwyn Hatfield. Should a deal be agreed, we might not see many changes. We are in this particular agreement, which is retained EU law, so EU laws are being introduced in the UK. It sets out how we will deal with certain audit provisions. Whether there is a deal or not, further changes will come through, because we will take decisions on how to work things and lay out further guidance on how we will assess qualifications and how we will assess the competency of authorities in the future. Fundamentally, this applies whether there is a deal or not, but obviously it focuses on a no-deal scenario.

As the hon. Member for Sefton Central will know, the transitional agreement is under this SI. For example, up to 2020, under the SI, there is confidence that we will be accepting the relevant professional qualifications and competent authorities within EEA states for the transitional period, so as not to be at a cliff edge.

The hon. Gentleman asked whether the FRC is confident that it will be able to establish mutual agreements, and whether it is in a position to do so. Currently it carries out—fundamentally speaking—oversight with respect to the regulation as it stands. I am therefore confident that it will be in a position to deal with further work that is necessary in the event of no deal—and in a situation where there is a deal, although we are talking about a no-deal scenario at the moment.

I want to touch on a question from my hon. Friend the Member for Amber Valley about recognition of qualifications, and authorisations. Under the SI—and the FRC is agreed—in the case of businesses whose financial years fall after 29 March there will be a requirement for auditors to register prior to the audit being signed. Effectively, there could be up to an extra year for auditors to do that, after 29 March. That is exactly so that it can be managed. There may be benefits for some auditors, because there is potential for them to say, as a selling point, they have done it ahead of time. Obviously that will not be before 29 March, and they will have until the time when they need to sign the audit to register. I hope that that gives my hon. Friend some confidence.

[Nigel Mills]

I think I understand what the Minister is trying to say, but just to confirm it, let us say a firm had the year end of 28 February 2019 and had to submit audited financial statements to a listing authority by some such time as the end of April or early May, and we had a no-deal Brexit. The auditors could not register for that before 29 March; but would they have to register before they could submit those accounts—so that they would have to do it very quickly in early April—or would they be grandfathered, in the event of no deal?

[Kelly Tolhurst]

My hon. Friend has outlined a situation where the company’s end of year would fall before the withdrawal date. As things stand the new registry would be only for instances where the financial year started after 29 March. It depends on where the years fall. In the case he gave, effectively, the auditors would not have to do it.

As to the number of companies affected, there are currently 291 EEA companies registered on the UK markets, and approximately 240 UK companies that have registered securities on EEA markets. The regulations affect a small number of organisations and in some cases a few other European countries. We are talking about a small number of companies. To give the Committee an idea of the scale, there are 1,000 listed companies in the UK. We have 3.8 million companies registered in the UK, 98.5% of which are small businesses, 20,000 large businesses and 35,000 medium-sized businesses, so the direct impact will affect a small number of companies and audit firms that are registered within the EEA.

On the point about the Secretary of State taking those powers regarding approval of adequacy and competence that have lain with the European Commission under the EU regulation, there would be full parliamentary scrutiny, as there is, with the Secretary of State having that power. As the hon. Member for Sefton Central knows, all Secretaries of State face full parliamentary scrutiny, and I would argue that our Secretary of State having those powers represents far more scrutiny than the European Commission under the current position. It is a positive move for the Secretary of State to have those powers, and it is right that they are held at parliamentary level rather than being delegated, at this particular time, to an arm’s-length body such as the FRC.

Regarding what the hon. Gentleman says about my confidence in the FRC and its ability, this particular regulation deals with a no-deal scenario, but as he and the Committee know, Sir John Kingman’s report into the FRC was published at the end of last year. We also have the work that has been done in the audit market regarding competitions. Whether we have a no-deal or a deal scenario, those pieces of work on what we do in this area to ensure that our markets are working effectively and that our public bodies are acting effectively will be ongoing. If there were to be any changes in the future, this SI would be taken into account. That is what Governments do. In a no-deal situation we would be in a position to change whatever we might want to in this area. I do have confidence in the FRC and in how we would manage that, and that the FRC would be in a position to deliver what is required in both a no-deal and a deal situation.

Regarding bilateral agreements, the hon. Gentleman mentioned the position with Ireland and asked whether we had had those discussions with other European states. Currently, 200 of the around 240 companies affected operate in the Irish market, so Ireland is the main EU member state that we will need to work more closely with in the future. Our officials are in discussions with our European neighbours all the time across a number of topics in this area, and more of that will go on as we head toward European Union exit date and after 29 March, whether or not we are in a deal situation and working toward a future relationship. We are committed to ensuring that we are able to deliver those agreements with our neighbours in the future.

It is paramount that, as the UK exits the EU, we maintain the integrity of the UK system for audit regulatory oversight. These regulations will help to facilitate that by ensuring that oversight of the audit profession continues to work effectively following our withdrawal from the EU. The regulations do not introduce a change in policy. As I explained, the fundamental elements of the current statutory audit legislation will remain the same after exit. The regulations before the Committee make only the amendments that are necessary to ensure that audit legislation remains operable in the UK following our withdrawal from the EU. The measures in these regulations will ensure that, and mean that the UK system for regulatory oversight will remain coherent and understandable for the businesses that rely on it. I therefore commend the regulations to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2018.