Commentary by David Chitty, International Audit & Accounting Director
Brexit, the impending departure of the United Kingdom (UK), from the European Union (EU), is the subject of extensive coverage and commentary. One subject to explore is the potential impact of Brexit on the setting of and support for international accounting and auditing standards.
This article assumes that the UK completely leaves the EU and has no involvement in the setting of policy for the single market. However, it should be noted that the UK's continuing engagement with the EU has yet to be decided and the degree of UK involvement could impact upon the issues raised in this article.
The EU has a record of supporting international accounting and auditing standards. Companies listed on markets in the EU have been required to report under IFRS since 2005. The 2014 Audit Regulation & Directive gives EU support to international auditing standards. As a major economic block the EU has become an important stakeholder in the standard setting process. EU adoption of IFRS for listed company reporting in 2005 was a breakthrough, enhancing the global credibility and adoption of IFRS.
The departure of the UK might result in a considerable change of perspective. The UK has the largest equity market in the EU and UK governments have consistently supported open market policies, including the adoption of standards issued by international bodies. In recent years, the European Commission, the administrative leadership of the Union, has developed policies that encourage equity as a source of business finance. Without UK influence, there might be a more protectionist approach and policies might be less favourable towards supporting equity. As a result, there might be less support for international standards that could be perceived as being "Anglo American" solutions to reporting.
Post-Brexit, there may be concerns that the EU, and nationals and institutions in the continuing EU have reduced influence over standard setting. Without the London capital markets, the EU's influence on market policies might appear to be diminished. Support for "pure" international accounting and auditing standards might decline and there might be a search for more regional solutions. In some EU member states, there is a strong tradition of tax reporting taking primacy over financial reporting. Tax reporting might once again take the lead, supported by the efficiency argument that it is better to have one national GAAP. The EU has processes for the approval of international accounting standards and is introducing a process for approving auditing standards. These processes might become more drawn out, delivering standards that are adapted for the EU markets. As a result, standards will be implemented later in the EU than in other countries, and could have regional differences.
Post-Brexit reporting and auditing in the EU might become more prescriptive. The 2010 Green Paper, the precursor for the Audit Regulation and Directive, was very prescriptive, seeking extensive legislative solutions to perceived market failings. The changes that resulted in the final Regulation and Directive are not solely the result of influence from UK sources, but in the future, the absence of direct UK influence might mean that a debate over similar policies take a different direction and have a different outcome.
A real concern arises from the potential loss of British expertise in standard setting and standard implementation. UK-based bodies and UK citizens have played, and continue to play, prominent roles in the standard-setting process. The International Accounting Standards Board is based in London and was the initial vision of a prominent British accountant. The UK Accounting Standards Board played a prominent role in the evolution of many of today's International Accounting Standards. UK stakeholders and accountants have contributed in many ways, whether directly in standard setting, commenting on proposals and standards, or playing leading roles in professional groups.
As a final thought, a full Brexit might lead to a change in the attitude of European institutions towards the international standard-setting agenda. Alternatively, full Brexit might lead to a more distinctive European perspective being given to the standard-setting debate, minus the long-standing, now separate UK voice. In time, we will know what the effect will be, but those with an interest in standard setting ought to speak out and present their vision for the EU's involvement with, and adoption of, international standards.