An auditing profession separated from the accountancy profession, a redefined audit away from true and fair and moving beyond the financials, and auditors suspicious rather than just sceptical are just some of the radical changes proposed in Sir Donald Brydon’s report on the future of audit.
The former London Stock Exchange chair and current chair of The Sage Group thinks that the current structure and purpose of the audit is beyond its sell-by date and needs a complete overhaul, reports the Institute of Chartered Accountants in England and Wales (ICAEW).
“The current audit framework is made up of a mosaic of legislation, statutory and self-regulation and formal and informal guidelines developed over a century,” he says.
“It is no longer capable of fully supporting the expectations of the users of audit. Audit is in need of urgent reform if we are to increase confidence in business and increase the chances of preventing unnecessary corporate failures. I have been given the opportunity to propose a robust framework for the future for auditors and all those who engage with audit.
“I believe this package of recommendations will significantly improve confidence in a proportionate manner and ensure the UK remains a leader in this field.”
Sir Donald wants to see a redefinition of audit and its purpose. True and fair, he says, is no longer appropriate because audit requires estimates and judgments. There should be greater clarification about who audit is for and its public interest role should be emphasised.
As far as the audit profession is concerned, it should be stand-alone and transparent, “rather than an adjunct to the accounting profession”, and governed by overarching principles.
Professional scepticism will no longer be enough – auditors of the future will need to be suspicious as well. They will be required to extend auditing beyond the financial statements to “reflect the wider interests of everyone who depends on the company’s ongoing viability”, and they will have a clear mandate to look for corporate fraud. Indeed, as part of their qualification, they will be required to be educated in forensic accounting and fraud detection.
Sir Donald wants the veil over auditors’ remuneration and fees to be lifted. He recommends that there should be new requirements for auditors to publish the profits they make from audit work and how much they earn as statutory auditors.
He also recommends that the auditor’s opinion is more open and understandable and that auditors should provide “greater granularity of information” about the estimates they use in the audit. And he wants shareholders to engage more with the audit team during the audit process and for them to be able to question the auditors at the agm.
It’s not just the audit and auditors that have come under scrutiny. Sir Donald has also targeted the directors’ role in the governance of their company. He recommends new reporting requirements for directors about resilience, public interest and audit policy, as well as an obligation to explain what they have done to prevent material fraud and to report on internal controls.
In January this year, Sir Donald was invited by the then business secretary Greg Clark to carry out an independent review of the quality and effectiveness of audit. In coming up with his 130-page report and recommendations, Sir Donald received and read 120 submissions totalling 2,500 pages, and held more than 150 meetings with companies, shareholders, stakeholders, academics, professional bodies, professional advisors and members of the public.
Last October, at a public meeting at ICAEW, he spoke publicly for the first time since he had begun the review, expressing his concern about the negative press auditors were getting. “It is not auditors that cause companies to fail, that’s the result of the actions of directors,” he said. “I’m a little troubled by the current mood that reaches for a shotgun aimed at auditors every time there’s a corporate problem.
“Audit needs to be an attractive profession that attracts the brightest and the best who can have confidence that a good piece of professional work will not be misdescribed in times of stress.”
The first organisation to respond to the report was the Financial Reporting Council (FRC) which, as the new strengthened regulator the Audit, Reporting and Governance Authority (ARGA), will have responsibility for overseeing any new reform of the profession.
A spokesperson said that the FRC would study the report with interest. “Many of his recommendations, if accepted by the government, will have significant implications for the FRC in respect of our activities and resource requirements.
“We have already implemented a number of the recommendations of the independent review of the FRC and anticipate being involved in delivering the broader reforms to the UK audit market that the government has initiated.”