Relationships with parents can be complex. Especially in audit. When we’re auditing a UK subsidiary of an overseas parent company, there are a few extra levels of complication, explains John Wallis, senior audit partner at Page Kirk.
As an auditor, you quickly gain a sense of when businesses are likely to present particular challenges. One of those situations is when there’s a parent company involved that is based outside the UK. Essentially, you find you’re grappling with group reporting, regulation and risk.
While UK subsidiaries will usually prepare accounts under UK GAAP, a parent company may use a different framework such as IFRS, US GAAP, or a local variant. From my point of view, that means checking reconciliation to group reporting packs, ensuring consistency of accounting policies and reviewing adjustments made for consolidation.
There are, however, a number of other specific issues to watch out for:
There can often be a group auditor overseas, who will send instructions to the UK auditor. This will outline the scope of the work required, the ‘materiality’ levels set by the group and reporting deadlines (which can often be tighter than those in the UK). Communication with the group auditor is therefore essential.
When overseas parents are involved, you’ll often find inter-company loans, management charges and transfer pricing arrangements. This all needs to be reported under the Companies Act of 2006. As an auditor, I need to ensure that the transactions are at arm’s length.
Cross-border transactions understandably raise scrutiny from HMRC. In an audit, we’d focus on documentation that supports pricing policies, risk of tax provisions or contingent liabilities, and consistency between financial statements and tax filing.
Although it’s not always the case, sometimes the UK subsidiary depends on their parent for funding. In this case, when we’re assessing going concern under ISA 570, getting letters of support from the parent company is essential, along with further evidence that the parent can provide that support.
If transactions are denominated in foreign currencies or the functional currency differs from GBP, issues immediately arise. From an audit perspective, we’re looking for correct exchange rates, treatment of foreign exchange gains and losses, and consistency with group reporting.
And although these are some of the major areas to be aware of, there are actually a whole range of other questions that can arise when auditing a UK subsidiary. Everything, in fact, from internal controls and governance, through to dividend and profit repatriation and compliance with UK filing.
An overseas parent often means additional reporting requirements, different accounting standards and tighter reporting deadlines. Your auditor may also need to communicate directly with the group’s overseas auditors to complete the work.
Alongside the usual accounting records, your auditor may request:
Providing these early can help keep the audit on track.
Usually, yes. The UK audit team will often liaise with the group auditor overseas to answer questions, provide reports and meet group reporting deadlines.
Planning ahead makes a big difference. Agreeing reporting timetables early, preparing group information in advance and working with auditors who have experience of international groups can reduce delays and avoid last-minute requests.
If your business is part of an international group, look for an audit firm that regularly works with overseas parent companies, understands cross-border reporting requirements and can communicate effectively with finance teams in different jurisdictions.
You certainly need to be working with an audit partner who is well acquainted with all the complexities and can tick the necessary boxes to ensure a smooth process. If you’re interested in discussing your own situation with an expert here at Page Kirk, just give us a call on 0115 955 5500 or email us at enquiries@pagekirk.co.uk.
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