LSCA President: Brydon report heralds regulatory change
With the publication of Sir Donald Brydon’s report on the quality and effectiveness of audit, LSCA President Nathan Steinberg reviews the key recommendations and possible impact on the auditing profession.
Following the election I was going to talk about the effects the result would have on London. However, I am sure that you all can make up your minds based on the various TV and press comments, including those expressed in London Accountant [add link to ‘business reaction’ article].
Suffice to say, I believe there will now be greater certainty so investment decisions can be made to generate growth.
However, the Brydon report on the quality and effectiveness of audit has now been published – there will be much debate but below are my initial thoughts and I would urge you all to read the full document as it is clearly dynamic in its recommendations.
Sir Donald Brydon proposes fundamental reforms of the audit profession which include the following:
- Establish a corporate auditing profession, regulated by the new Audit, Reporting and Governance Authority (ARGA), the proposed replacement of the Financial Reporting Council (FRC)
- Revisit the existing definition of professional judgment
- “True and fair” to be replaced by “presently fair in all material respects”
- Directors to publish a Resilience Statement to cover the going concern issue
- Directors to present an annual public interest statement
- Transparency over audit fees
- Company shareholders to be able to question the audit committee chair and the auditor at the AGM.
- Auditors to act in the public interest beyond solely those of shareholders.
- New duties regarding fraud
- New reporting on internal controls
- Directors required to make a statement that payment of a proposed dividend in no way threatens the existence of the company in the ensuing two years.
- Department of Business, Energy and Industrial Strategy (BEIS) and ARGA to work with auditors to create necessary protections and policies for audit.
This will be a revolutionary change to the accounting and audit profession
As ICAEW chief executive Michael Izza says: “Sir Donald’s thorough report contains some bold proposals which could change the way the accountancy profession operates within the UK business landscape. We agree that audit urgently needs to keep pace with the needs, not just of investors, but of wider stakeholders in society, and we are long-standing advocates of proportionate and practical change to restore public trust.
We are pleased Sir Donald recognises the role played by all the directors of a company, and the need for the whole board to be accountable. We will consider the recommendations in detail and continue to work with all parties to deliver a coherent programme of reform.
Additional comment can be read in economia’s report: Brydon wants radical shake-up of audit and auditors
My initial personal view, not those of ICAEW or LSCA, is that the proposals will clearly change the audit profession and its regulation. While the report extends directors’ responsibilities in respect of audit, it does not appear, in my view, to go far enough.
As we all know, the audit is an historic report and directors run and manage their company throughout. Companies generally fail due to bad management, not due to failed audits.
But I appreciate that Brydon was a review into the quality and effectiveness of audit, not boards. He recommends learning the lessons from the Sarbanes Oxley regime in the US, but indicates this issue was not central to his review.
However, there must be more formal responsibility for the directors of Public Interest Entities (PIEs) as well as audit reform, otherwise without this the result of the proposed audit reforms will be more qualifications and subsequent failures.
I believe that unless BEIS takes steps to reform board conduct and responsibility, combined with audit reform, any reform carried out could be ineffective.
Our current challenge is to make sure there is joined up thinking in the approach and to represent this to government.
Nathan Steinberg is President of the London Society of Chartered Accountants. The views expressed in this article on his own and do not represent ICAEW or LSCA policy.
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