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Regulatory Background

Role of the FRC

The FRC has statutory powers delegated by Government to set the detailed regulatory requirements concerning the third country auditor regime in the UK. In practice, the FRC is responsible for maintaining the UK Register of Third Country Auditors (including registering and deregistering third country auditors) and for performing external quality monitoring of audits performed by third country auditors in certain jurisdictions.

The UK requirements are established within the legal framework set out in the Companies Act 2006, the Statutory Auditors and Third Country Auditors Regulations 2013 (SI 2013/1672) and the Statutory Auditors and Third Country Auditors Regulations 2016 (SI 2016/649).
 

Third country auditor regime

The regulatory regime governing third country auditors arises principally from EU Directive 2006/43/EC (the Statutory Audit Directive). The Statutory Audit Directive was adopted by the EU on 17 May 2006 and transposed into UK law in 2008 (mainly Part 42 (Chapter 5) and Schedule 12 of the Companies Act 2006). The Statutory Audit Directive was amended by EU Directive 2014/56/EU on 16 April 2014, which was transposed into UK law in 2016.

The regime applies to non-EU auditors of companies incorporated outside of the EU and listed on an EU-regulated market. In the UK, this is most commonly the main market of the London Stock Exchange. Further information on who is required to register as a third country auditor can be found below.
 

Who is required to register as a third country auditor?

An auditor (individual or firm) must register with the FRC if it provides an audit report concerning the annual or consolidated accounts of a company incorporated outside the EU whose transferable securities, within the meaning of Article 4 (1) (18) of EU Directive 2004/39/EC, are admitted to trading on a regulated market, within the meaning of Article 4 (1) (14) of EU Directive 2004/39/EC, in the UK.

However, registration is not required if one of the following apply:
  • The company is an issuer exclusively of debt securities, within the meaning of Article 2 (1) (b) of EU Directive 2004/109/EC, admitted to trading on or before to 31 December 2010, the denomination of which is at least €50,000 per unit or, in the case of debt securities denominated in another currency, equivalent, at the date of issue, to at least €50,000; or
  • The company is an issuer exclusively of debt securities, within the meaning of Article 2 (1) (b) of EU Directive 2004/109/EC, admitted to trading after 31 December 2010, the denomination of which is at least €100,000 per unit or, in the case of debt securities denominated in another currency, equivalent, at the date of issue, to at least €100,000.
Pursuant to Article 45 (4) of EU Directive 2006/43/EC, an audit report of a relevant issuer that is signed by an auditor that is not registered with the FRC as a third country auditor has no legal effect in the UK.

The registration requirements differ depending on where the auditor is located. No registration is required under the current legal framework in the UK if the auditor is a registered auditor in the UK or is approved in accordance with the Statutory Audit Directive (as amended) by an EU Competent Authority to carry out audits of annual accounts or consolidated accounts required by EU law.
 

Article 45 of the Statutory Audit Directive

Article 45 of the Statutory Audit Directive (as amended) sets out the regulatory requirements for the registration and oversight of third country auditors, including the external monitoring of audit quality and for investigations and sanctions.
 

Article 46 of the Statutory Audit Directive

Article 46 of the Statutory Audit Directive (as amended) allows Member States to derogate from the requirements of Article 45 where the third country auditor is subject to a system of public oversight, inspections and investigations which the European Commission has recognised as equivalent, or where the third country auditor is within transitional arrangements adopted by the European Commission. Further detail is set out below.
 

Equivalent jurisdictions

The European Commission has determined that certain jurisdictions have a system of audit regulation that is equivalent to that required of EU Member States under the Statutory Audit Directive (as amended). The relevant determinations are made in the European Commission Decisions of 19 January 2011 (2011/30/EU), 13 June 2013 (2013/288/EU), 25 July 2016 (2016/1223) and 14 July 2016 (2016/1155).

A list of equivalent jurisdictions can be found here.

The European Commission made these Decisions on the basis that Member States would dis-apply some or all of the regulatory requirements that would otherwise apply, in particular the Member State’s system of external quality assurance. 

In the UK auditors from equivalent jurisdictions have to register with the FRC but, in common with other EU Member States, the UK system of external quality assurance reviews do not apply, other than in respect of audit engagements outside the scope of the third country auditor’s home regulatory regime, and provided that UK auditors of companies listed in that country are not subject to less favourable treatment.
 

Transitional jurisdictions

The Commission Decision of 19 January 2011 (2011/30/EU), as amended by the Commission Decision of 25 July 2016 (2016/1223), also exempts for a transitional period auditors of companies incorporated in certain jurisdictions from most requirements of Article 45 (as amended), on the condition that they provide EU Member States with specific information.

This is based on an assessment that the jurisdiction is making substantial progress towards setting up an audit regulatory system equivalent to that required in the EU.

A list of transitional jurisdictions can be found here.

Auditors from transitional jurisdictions have to register with the FRC but, in accordance with EU requirements, are exempt from other regulatory requirements (other than in respect of audit engagements outside the scope of the third country auditor’s home regulatory regime).
 


The FRC has issued statutory Directions giving effect to the European Commission Decisions of 19 January 2011 (2011/30/EU), 13 June 2013 (2013/288/EU), 25 July 2016 (2016/1223) and 14 July 2016 (2016/1155), in accordance with section 1239 (7) and section 1242 (4) of the Companies Act 2006, which are set out in the below document.

Note on the Legal Framework in the UK and FRC Directions
 

 

Article 45 jurisdictions

Jurisdictions that are neither equivalent or transitional are termed Article 45, as the full requirements of Article 45 of the Statutory Audit Directive (as amended) apply to auditors based in such jurisdictions. In particular the third country auditor is subject to the FRC system of external quality assurance in respect of relevant audits. 

The FRC published a consultation document in March 2012 on the approach it should adopt to external quality assurance of Article 45 third country auditors. The consultation, together with the responses and feedback paper, can be found here

In general, third country auditors registered in accordance with Article 45 are based in jurisdictions that do not have well developed systems of audit regulation or independent external inspection systems. There are also wide variations in the significance for UK investors of individual issuers incorporated in such jurisdictions. Therefore, the FRC has adopted a risk-based approach to its system of external quality assurance in respect of Article 45 third country auditors, with the aim of proportionate and cost effective regulation.

One of the conditions of registration under Article 45 is that the third country auditor agrees to cooperate with an inspection by the FRC in respect of relevant audits. 

FRC inspections of third country auditors started in the summer of 2013. The results of our inspections can be found in the FRC Developments in Audit publication, which is available on the FRC website.
 

Third Country Auditor Register Procedures

The FRC has the power to remove a third country auditor from the UK Register of Third Country Auditors in certain circumstances set out in the Companies Act 2006 and Statutory Auditors and Third Country Auditor Regulations 2013.

The process for the de-registration of third country auditors (where the FRC Board considers there to be grounds for removing a third country auditor from the UK Register of Third Country Auditors) are set out in the Third Country Auditor Register Procedures.

The Third Country Auditor Register Procedures can be viewed here, and were finalised following a public consultation, which can be found here.

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