ICAS responds to the FRC’s proposed amendments to its Third Country Auditor policy

We have submitted a response to the Financial Reporting Council’s (FRC’s) proposed temporary amendment to its policy regarding Third Country Auditors (TCA).

In February the FRC issued a consultation proposing a temporary amendment to its policy regarding Third Country Auditors (TCA)at the UK government’s request to encourage certain China-registered entities to list on UK markets. 

On 27 March we submitted our response to that consultation. This highlighted the following key messages: 

• We believe it is reasonable to allow the listing in London of the securities of eligible Chinese businesses. However, we are not convinced that sufficient information and evidence has been included within the FRC’s proposals to address the information needs of investors and the potential risks of the proposed amendment. 
• A listing must include appropriate caveats and safeguards to inform investors and to ensure they have the information necessary to assess whether there are any matters which might impact on the quality of financial reporting. 
• Chinese auditing standards are not equivalent to International Standards on Auditing (UK). Therefore, it is important to communicate clearly to potential investors what the main differences are, the related risks and their potential impact, to help inform their evaluation and decision-making. 
• This is a specialist topic so if wider stakeholder views are expected on the proposals contained in this consultation paper, we believe that the onus is on the FRC¸ Financial Conduct Authority and Department of Business & Trade (DBT) to explain the differences, risks and impact for the UK market to help inform consultees and maximise informed responses. 
• We note that there may be reciprocal opportunities for the UK but we would like to see more information on this with an explanation of how it supports longer-term growth and evidence of the demand in the consultation paper.   
• We would welcome further explanation from DBT about how allowing Chinese entities to issue global depository receipts in the UK and accessing UK capital markets will promote growth in the UK. This may promote investment growth but is that the type of growth the government is intending with this proposal and how material is this to the UK growth agenda? It is unclear if enabling access to UK capital will support investment in UK businesses or overseas. We are not fully convinced by the reasons cited in the consultation paper. 
• We are not fully persuaded why a temporary amendment is needed and question if this is being rushed through without appropriate due process.   
• We would like information on whether the FRC would be able to inspect the work of the Chinese firms involved in any such audits and, if so, deal with any issues identified. 

Read the full response