The UK parliament’s upper chamber has warned the country’s business minister to ensure the audit regulator is able to scrutinise international accounting standards after Brexit.
In a scrutiny report assessing government proposals for a post-Brexit endorsement regime for the International Financial Reporting Standards (IFRS), a House of Lords committee said Greg Clark must “satisfy himself as to the Financial Reporting Council’s [FRC] ability to provide effective oversight of this important function.”
The report was published last week, prior to the government’s decision to abolish the FRC and replace it with a stronger and more accountable body.
A spokesperson for the business, energy and industrial strategy department told IPE: “We want to ensure that UK registered companies that currently use IFRS will not have to change their processes for preparing annual accounts on the UK’s exit from the EU.
“The statutory instrument gives the government powers to adopt new international accounting standards for use in the UK.”
The government published legislation to bring in the new endorsement mechanism on 31 January.
An explanatory memorandum accompanying the draft legislation stated that UK’s overall policy objective was to remain aligned with IFRS rules as issued by the IFRS Foundation.
BEIS said in an accompanying memorandum that it was “in the UK’s interest to maintain convergence with IFRS after EU exit” given that IFRS are “used globally, by over 140 jurisdictions including 15 of the G20 countries”.
Nonetheless, the addition of UK parliamentary oversight after Brexit raises the prospect that IFRS changes and additions will face intense scrutiny before they are endorsed for use in the UK.
Pre- and post-Brexit account rules
As an EU member state, the UK currently relies on a single EU-wide endorsement mechanism to ratify international accounting standards across the 28-member bloc. IFRS rules are currently mandated for use by all EU listed entitles .
When the IFRS Foundation, which oversees the rules, publishes a new accounting standard, the EU looks to endorse that standard under a process overseen by the European Commission.
The EC also works closely with two consultative bodies during this process, the European Financial Reporting Advisory Group and the Accounting Regulatory Committee. The former is an expert technical advisory body, while the latter group represents individual member states and is chaired by the Commission.
However, once the UK leaves the EU, it will need to put in place its own endorsement mechanism.
Under the proposed regime, the government intends to establish a new endorsement body to operate independently of the FRC. In addition to acting as the UK’s accounting and audit watchdog, the FRC is also responsible for setting UK GAAP (generally accepted accounting principles) requirements.
Following fierce criticism of the FRC and its oversight of the audit profession in the UK over the past two years, members of the House of Lords have identified the IFRS endorsement process as a critical area of public policy.
One of those critics, Liberal Democrat peer Baroness Sharon Bowles, told IPE: “The government has more or less copied and pasted the EU’s endorsement criteria, which means that IFRS must conform to the principles of true and fair view.
“While I accept that there is probably little choice but to do this, it is important to make sure that preparers and auditors assess the accounts against the specific requirements of the Companies Act 2006.”