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On the latest ICAEW Insights podcast, we consider the future of audit – and the impact of the government’s proposed reforms on professionals in the sector.


Philippa Lamb


  • Sir Andrew Likierman, former Dean and Professor of Management Practice, London Business School
  • Andrew Ratcliffe, Non-Executive Director, Barclays Bank UK
  • Mark Babington, Executive Director of Regulatory Standards, Financial Reporting Council
  • Iain Wright, Managing Director, Reputation and Influence, ICAEW

Hello and welcome back to the Insights Podcast. I’m Philippa Lamb and this time we’re looking at the future of the audit profession. It’s been five years since construction services giant Carillion collapsed, leaving debts of nearly £7bn. Its dramatic failure, which cost the taxpayer £150m, raised questions about whether our corporate reporting is fit for purpose, and whether the audit profession itself needs an overhaul. Since 2018, we’ve seen multiple sector reviews and consultations with the government finally announcing its plans in 2022. The stated aims: to rein in the dominance of the Big Four, create a new regulator and enhance regulatory powers to ban failing auditors. But is that enough? To find out more I’m joined by Andrew Likierman of London Business School; Barclays Bank UK Director Andrew Ratcliffe; Mark Babington, Executive Director of Regulatory Standards at the Financial Reporting Council, and ICAEW’s own MD of reputation and Influence, Iain Wright. Hello, everyone. Thanks for being with us.

Iain, it’s five years since Carillion. Can you just briefly remind us what happened?

Iain Wright: Well, as you were saying Philippa, Carillion was a UK-based construction and facilities management services company based in the West Midlands. It was a major strategic supplier to the UK public sector. It did an awful lot of different things: it built roads; it built hospitals; it then ran hospitals on behalf of the NHS; and it provided defence accommodation. It was a strong publicly listed company and had very, very positive financial figures. The company’s 2016 accounts, which were published in March 2017, presented a very, very healthy company. And on the back of those, there was a record dividend of about £80m that was paid out. And as you were suggesting, following that, its demise was very rapid. Just four months after the accounts were published, there was a reduction in the value of its contracts to the tune of about £850m. This was increased to over £1bn in September 2017 and it went into liquidation more or less five years ago, as we are now – January 2018 – with liabilities of nearly £7bn, and just £29m in cash. It had 43,000 employees, including about 20,000 here in the UK.

And then questions were being asked in terms of what was the management doing? Where was the board? Where were the non-execs in challenging and scrutinising the business model and the operational results. And then, fundamentally for our profession, where were the auditors in all of this? How could it be that the previous year’s accounts were given such a glowing bill of health, were presented as a true and fair view, and then it fell rapidly. On the back of that a number of reviews were carried out by the BEIS [Department for Business, Energy and Industrial Strategy] select committee in parliament. Then there were reviews carried out at the behest of governments, such as the role of the FRC, carried out by Sir John Kingman, and the purpose of audit, carried out by Sir Donald Brydon. And as a result of this, five years on, we are where we are; we’re awaiting full and final audit reform and a legislative programme on this. But a number of things have been put in place to try and deal with this.

PL: Then last year, BEIS announced these new measures for the sector, the government wanting to reduce the dominance of the Big Four audit firms? How? What is the plan?

Mark Babington: In a sense, what we’re looking at is how to create a more diverse and more robust market. And that means bringing in a broader range of credible players who can take on large and complicated audits. But we have to recognise that that is something that takes a period of time in order to build the necessary skill, the necessary capacity, and government has set out measures in the government response to do that.

PL: Is this actually going to involve restricting the proportion of business the Big Four can handle?

MB: Well, if you look at the government response, it sets out a basket of different measures. Some of those are about reducing barriers to market entry. Some of those are about creating a legislative framework and powers to enable the regulator to be more interventionist if required. Will it work? We’ll have to see, won’t we? In a sense, you’re asking a market to do something that it’s not previously done. So one of the things that we will have to do is think very carefully about how we continue to drive those measures and report back on progress.

PL: What about the new regulator, the Audit Reporting and Governance Authority? What’s ICAEW’s view on that?

IW: If you look at a particular aspect of the whole assurance and reporting ecosystem, it will be lopsided and you won’t get really good, sustainable reform. You can’t just focus on audit. You’ve got to focus on that whole element, a whole ecosystem of audit reporting and, indeed, corporate governance and make sure that the reform package deals with that on things like audit quality. But also the role of directors: directors manage companies; directors run companies, and are ultimately responsible for the success and/or failure of those companies. They need to be included as well.

PL: And the regulator would have the power to ban failing auditors from reviewing large companies’ accounts?

MB: We already have a power, which enables the regulator to impose registration conditions on public interest entity auditors. That’s already something that’s in place. One thing to remember – one thing to stress – is that although we are waiting for a package of legislation, which government has committed to, we’ve actually put in place a number of significant steps already

PL: There’s been quite a lot of talk about unfair criticism of the profession, as well as legitimate areas of concern. Do we feel it’s been possible to delineate which is which?

IW: We haven’t had a final report, a final definitive conclusion on Carillion. Michael Izza, the chief executive of ICAEW, called Carillion a watershed moment, and I think it was when commentators as well as the profession said, we act in the public interest, it’s absolutely vital that we are seen to act in the public interest. That’s how we fulfil our Royal Charter. And if that takes a dent, we can’t really fulfil our obligation. So we need to address that. Whether it’s fair or unfair, that’s what is happening, and has happened for the last five years or so. So I think, in order to ensure that we can be seen to have objectivity, that we’ve got integrity, that we do act in the public interest, it’s right that we step up to the plate on this.

PL: And what about the timeline for all this to come into play?

MB: The timeline is that the government has committed to laying down legislation which then has to go through the parliamentary process. So all of that is, of course, in the hands of ministers. You may have seen there have been a number of interested parliamentary questions. Government continually has reiterated its support for the process and its intention to introduce legislation.

PL: We’ve covered the road from the trigger event of the Carillion collapse to clear changes the government wants to see in the way that audit operates and, indeed, is regulated. What about more intangible questions about the role and purpose of audit itself? What do we feel is the core purpose of audit?

Andrew Ratcliffe: It’s to give credibility to financial information that’s used by the capital markets.

PL: Is that it?

AR: Pretty much.

IW: You say: “Is that it?” That’s pretty big given that, you know, you’ve got trillions of pounds flowing across the globe. And essentially what you have is, in the modern economy, large companies managed by people who are not necessarily the owners of those companies. Those owners, and it could include us – in terms of our pensions being held in funds that are invested in these companies – we want to know that those companies are being run appropriately to a high quality, and that the financial statements that are presented are true and fair, so we can take assurance that actually we can invest with confidence. That trust is an absolutely essential foundation of the capital markets of the 21st century. And so audit provides the absolutely essential role for a third party, saying: “We’ve looked at this, we’ve questioned and scrutinised, we’ve looked through the technical prism of accounting and auditing standards, and we can give an opinion on the true and fair view of these financial statements.” That’s key.

PL: The business world is constantly evolving, isn’t it? And I’m wondering whether the role of audit is evolving a lot in parallel, in ways we haven’t yet discussed, to meet the needs of business and indeed of the regulator?

MB: Well, it does change, and it changes at pace at the moment. So what we’re seeing is an ever-growing expansion, for instance, in non-financial reporting – seeing more information about climate, and wider ESG reporting. To take Andrew’s point about the importance of capital markets being able to trust this information, many investors are taking capital allocation decisions now, driven by non-financial information, not just the health of the balance sheet and the profit and loss account. So it’s very important that that information has integrity, and people can place reliance on it as well.

Andrew Likierman: Can I just add one point in terms of the importance of audit? If you look at countries which don’t do this well, where people don’t believe the financial statements, where you can’t trust the financial information – this is really serious for the economy. It underpins the whole way the economy operates. And it’s something which, in general, we take for granted in the UK. It’s great that we do but it is not to be taken for granted everywhere in the world.

PL: I guess even here we have a core conflict – that auditors are advising clients who pay them and reporting on clients who pay them?

AL: But that’s integrated into the system. That is not new, the potential conflicts are well known. And the systems are there to say, we recognise those conflicts, and we’ll have to operate with them.

PL: Do you think our systems are working well?

AL: That’s a much bigger question. And, by definition, since this podcast is about something that isn’t working very well, there’s room for improvement, certainly.

PL: You’ve made a particular study of the element we haven’t talked about yet here, which is the professional judgement, good judgement, in people involved in audit. You have come up with six factors?

AL: Yes. Just to be clear on why I’ve done this and why I think this is relevant. We’re talking about changing institutions, we’re talking about changing rules. What I’m particularly interested in is to say, how does the thing actually work on the ground? How do people make the difficult choices in terms of professional judgement when they’re doing the audit? So that for me is in a sense just as important. And that’s why I’ve chosen to focus in this area rather than on the institutional side.

So now on to the six elements. As far as I’m concerned, you can pin judgement down. A lot of people say you can’t pin it down, can’t know exactly what it is. Well, I do think you can pin it down. And what I’ve identified are the six elements of judgement that I believe are essential to the judgement process. Number one is what we take in. Taking in is about getting information in – what you see, what you hear, as part of the job. The second one is about who and what you trust. That’s to say, your colleagues, the information you get from the management as an auditor. Number three is about the relevant knowledge and experience you bring to the process yourself. Number four is about the feelings and beliefs that act as a filter to the information you get and what you know already. And then there’s the question of how you make the choice. Finally, if you’re taking a decision on something, can it be delivered? Those are the six elements for me. And I would apply them not to just audit, but to anything we do, any choice we make.

AR: Maybe just to ground what Andrew said as to why this is important here – big generalisation coming – but I would say the preparation of any set of financial accounts and its subsequent audit is a mixture of some backward-looking fact verification that is objective, and some forward-looking assumptions, which inevitably need judgement – they need judgement to make those assumptions. You need judgement, then as an auditor to evaluate those assumptions. And I would claim that a lot of the issues we’ve had recently are instances of that judgement failing, in some sense, in both those originally taking it and those looking at it. I think this is really important, a really important factor that needs to be brought through in where audit goes to from here – over and above all the things that are being done, regulatory and legislative. And I’m not trying to say those aren’t important – they are. But I think – Mark might disagree with me – but I think it’s difficult to legislate or regulate good judgement. You can put in measures that maybe limit bad judgement, or put consequences around bad judgement. But the issue of whether or not your judgement is good, I think, is a very personal one, and one that you need to reflect on and ask yourself questions. And I think Andrew’s list of six is a really good prompt for that mental process.

MB: I think that Andrew makes an excellent point. And indeed, one of the one of the challenges is that, from a standard-setting perspective, the way not to get more professional scepticism is to write in standards; you need to do this with more professional scepticism. So we were very pleased last year to be able to develop a professional judgement framework reflecting just that: that it is a personal judgement based on assessment of a number of factors. And indeed, Sir Andrew was very kind and participated in our discussions, in our working groups, to be able to do that.

PL: Yes, I wanted to ask you how that chimes with this?

MB: It very much came out of Sir Andrew’s challenge in his letter to Donald Bryden, which is that judgement is absolutely fundamental to audit. Indeed, if you’re wondering, why do you pay for an auditor, it’s to pay for someone who’s experienced in exercising that professional judgement, to test whether or not information is reliable. So we worked up a framework and supported it with a series of examples that allowed the auditor to follow that through and demonstrate the critical points in taking some of the decisions they’re asked to take. I was really interested when Andrew talked about how things have changed. Imagine in his world of banking, the impact of IFRS 9 and accounting for expected credit losses – you will no longer just be looking back, you’re looking forward. That brings a whole new set of challenges, because you’re not looking back at a historical series of information; you’re looking forward. So you need to be able to develop a framework to challenge that and set out the particular questions you want to ask, at what point of the process, to make sure that you’re always reinforcing that. And I think the other thing that’s really, really important and is quite often a trap for the auditor, is that they’re trying to find information, or they’re trying to find evidence, that corroborates something in a set of financial statements. It is equally important to look for the evidence that undermines that corroboration says that it’s wrong.

PL: So you can codify this up to a point, then, but it’s a mindset as well, isn’t it?

AR: I’m just reacting against the word codify. I wouldn’t use that.

PL: What would you prefer?

AR: Well, the other framework around here, and it needs mentioning, is the ICAEW Ethical Principles, which is based on the IEASB one. I started as an auditor, rather than as a director, and I used to talk to the teams that work for me; when I was president [of ICAEW] I talked to new students about this, the five principles. And these are in the context of the profession, as opposed to the more general scope that you’re trying to do, Andrew, but there’s overlap. So just to run through them. Integrity – you’re straightforward and honest. Objectivity ­­– you seek to avoid bias. Professional competence – am I competent enough to do this? Do I need help? Am I going to exercise due care? Confidentiality, which is a very specific one for the job we do. And then the interesting one, which baffled me to begin with – professional behaviour; I think this comes down to everything that you do as a chartered accountant reflects on your Institute and everything your Institute does reflects on you.

So to come back to why I react against the word ‘codify’. I don’t think we should be trying to come to the single set of principles that capture all this, I suspect that might be a futile attempt. But I would suggest to anybody who’s wrestling with this to look at those ethical principles to look at the FRC’s guidance, to look at Andrew’s six principles and use those as a stimulus for thought, because that’s what you want, rather than, “Oh, I’ve got a code and I can go down the list and I tick it off. I’ve done that I’ve done that. I’ve done that.”

AL: Can I just take up your point about the link to the five ethical principles? Because under objectivity, objectivity is defined as: to exercise business or professional judgement. So there’s a very clear link between the two.

PL: It’s a cultural shift, a cultural improvement?

AL: I hope so. You know, the standards in general in the UK are high. Carillion is an outlier and it’s a watershed outlier, but it’s definitely an outlier – and not the only one. But I think we can’t just simply say all audit is terrible. Rightly, standards are going to be raised. I’m sure that’s true. And so this is all very much part of that raising of standards.

PL: How do you teach that mindset to young auditors?

AL: When people come into any profession they’re talked to about what the ethos of the profession is, they’re told what to do. They look at what other people do, they look at normal practice. All these things they absorb, as part of the way in which they then undertake their professional duties. And so teaching is about the messages from the top, about the way in which you should conduct yourself. It’s about training, if necessary. It’s about appraisal – when you’re doing your job, as to whether you’re doing it well. It’s about the way in which the firm itself organises itself and regulates itself. There are lots of ways in which you can improve judgement.

PL: I think KPMG in the Carillion situation showed us that younger members of the team didn’t feel able to challenge their senior line managers, quite understandably. How do you create systems where people are genuinely able to do that?

AL: That is one of the elements here of how one exercises good judgement. It’s creating what has become known as safe space, a meeting or interaction where people feel safe, about challenging somebody senior to them. You just have to think about so many organisations which have gone bad because people don’t challenge their seniors. It’s not just audit, it’s in any field where, as it were, the boss was king or queen and that’s really the end of the story. Now that is not healthy in any environment. So we’re not talking about something specific to audit here.

AR: I’d say it’s reciprocal. It’s not just about people feeling able to challenge the boss, the partner, whatever it is – but it’s also the boss, the partner, the senior person being open to that challenge. When I was an audit partner, all my team would be seeing things in much more detail, much more volume, than I would ever do. So the key question is, what do you guys think? What have you seen? What is it telling you? Was does it feel like? Did I always do it? No, because of time pressure and whatever, you never reach that objective. But I think, certainly in audit, which I know best, if you’re sensible, as an audit partner, you should be encouraging and seeking that challenge and that feedback from your team.

AL: Absolutely. And this is a very important element of good judgement, by people in leadership. Are they able to take on suggestions, improvements, changes made by people who are junior to them? Or indeed anybody else? A lack of openness to that probably means somebody’s judgement is on the decline?

PL: Measuring is my next question. How does that work?

AL: We’re talking about a process here. And what the FRC has done in its guidance issued last year, is to say, this is a process. And we’ll be looking at the way in which you conduct your process. So I think it is ‘pinnable down’. People have often said, “Oh, we can’t do this.” But I do think it’s possible – you know, this is not so complicated. And it’s the way in which any profession has to do its business.

AR: The other piece I’d offer here, which is something that I evolved in terms of taking the temperature of a culture or understanding a culture, is that it was important, as an auditor going into a company, to ask how does this company work, to try and tap into the stories that people tell about themselves and their company? This is really basic. When we were all hunter-gatherers, we sat around the fire in the evening, and we probably took the piss out of each other and told stories about hunting or whatever. It’s a very basic human thing to tell stories. And I think the nature of the story, and what the story means, can be very indicative of what the nature of the organisation and the nature of the culture is, including – as you say – the quality of judgement and the quality of whether challenge and inquiry is encouraged.

AL: I think, you know, this can be done in very specific circumstances. We’re talking here about running up to the deadline for the accounts to be signed, where a number of things have not been agreed and the pressure is on both sides. How you tackle that is not a matter of chance. You can help people by telling the stories, by saying what you do – what kind of action you might take in these circumstances. So stories, I think, are very important, especially if they actually provide a means by which people can do their jobs better.

MB: I think we’ve seen a very positive sign of this recently. We went through a very difficult period with a pandemic and lockdown. And actually what it allowed us to do was focus back, to say: “What is our purpose?” Our purpose is to focus on the provision of high-quality information to financial markets for decision-making. And that actually stripped everything else away, it bought a lot of clarity. And what we saw is actually many more auditors saying, “We’ve got a deadline, we can’t meet that deadline and deliver a high-quality product.” So they pushed back, and reporting to markets happened later. But that was a good outcome, because it was more reliable information. It had obviously been subject to all the necessary checks and challenges. And that was a very positive cultural sign and a very positive judgement sign.

PL: So the practical difficulties of the pandemic triggered that ­– people felt able to do that – perhaps in a way they wouldn’t have done before? Or was it something else?

MB: I think it was a willingness to say: “Look, we can’t do this as we might have done it before. We’re going to have to think about how we do it in a different way.” We apply, as Andrew said, a number of those principles in order to do that. But ultimately, it did show that out there, the profession was willing to challenge and push back and say: “If you want a high-quality audit, and if you want us to be able to assure your information, we need more time. We have more questions, we might need more evidence.” But that’s a good thing.

AR: I think part of this – something we haven’t mentioned, but I think is in your framework, Andrew, that we ought to talk about – is risk appetite. And I think what you’re talking about is a shifting of the risk appetite, to recognise that the risk of a bad judgement is a bigger downside than maybe I’ll give it credit for. And that is something certainly the regulator should be doing. You can’t impose it, you create the conditions to encourage it. But I think what you’re talking about is a greater preparedness of auditors to say: “Sorry, we just can’t do it within the time. I’m not going to go with a flyer on this one, I need more time.” And that’s a good thing.

PL: Andrew, you must find that very encouraging.

AL: I do, of course, and just to take the point about risk ­– risk is an integral part of this judgement framework; you know, you look at risk at every stage of it, actually, because you’ve got to look at the question: what are the consequences of what I’m about to do. I do find it encouraging.

IW: I read just before the pandemic, in Harvard Business Review, a piece by Sir Andrew on judgement in leadership. I reread it as a result of doing this, and it was as good as I remembered it from two or three years ago. There’s a definition of judgement in it saying it’s the ability to combine personal qualities with relevant knowledge and experience to form opinions and make decisions, which is a great, succinct definition. What I like about that is ‘personal qualities’ and the implicit feeling that, in order to make judgments, you need a good ethical framework – that’s really important. And that is, as Andrew Ratcliffe said, at the heart of the five fundamental principles of our code of ethics.

What has also been mentioned today is that sense of culture, the ability to be able to be challenged, upwards as well as across. But of course, the culture that you enter into in the training contract to become a chartered accountant – you have to think about that time and time again, throughout your career. This is why I would emphasise the importance of continuing professional development. And we’re in the process, at ICAEW, of revising our CPD in response to changing societal expectations. What the regulator wants, quite rightly, is [to know] how are you dealing with these challenges? Both technical matters – of course, you’ve got to stay up to date with the standards – but how you deal with the ethical challenges on a day-to-day basis in your career, whether you’re an auditor or not. And so mandatory annual ethical training – and we can provide that free of charge from the Institute – is going to be absolutely key this year for Chartered Accountants. I think that’s really important in terms of how we deal with these challenges.

PL: If we take this to its logical extension, it plays into recruitment, doesn’t it? The sort of people you’re bringing in in the first place?

IW: I really don’t want to generalise in terms of what does the new young generation want. But they really place importance on purpose. For example: “I don’t want to work for any oil company. How are you changing the world? How are you going to deal with the transition to net zero? What are you doing about exploitation and supply chains?” People want to work for good, purposeful companies, and be in good, purposeful professions. And I think this is an important requirement and an important ingredient. I think it’s so important that, as part of that public interest, you can be seen as being ethical, you stand up in terms of objectivity and integrity; it’s absolutely key.

But the final thing I want to mention, briefly, is the FRC’s professional judgement framework. I like it a lot. I think it talks about mindset, it gives some really good illustrative examples so people can say: “Yes, I can apply that in my own life.” But the bit that I found the most interesting, insightful, is almost that psychological element; you know, you may think that you’ve got great judgment, but you may be afflicted by particular biases in terms of confirmation bias or group think, and it challenges that. I think one of the [problems] is overconfidence. I could be a senior executive in business thinking, I’ve done that through good judgement. You don’t need to challenge me, I know it all son. That sort of thing. And I think the FRC’s framework makes you stand back as a professional and think, hang on, am I thinking about confirmation bias? Am I thinking about group think? What am I doing about automation bias? If the computer says no, do I rely on that too much? I think that’s why its value really comes into this.

AR: Will you allow me a short anecdote? I think it is really illustrative. This is about Jim Callaghan. Apparently when he arrived at a new department, he would be sat down with all the civil servants and the Permanent Secretary would come in and introduce everybody. And his standard question was: “Ok, on this team, who is who is the ‘Hold on a minute’ guy?” “What do you mean minister?” “Who is the person, when we’ve taken a decision and we’re getting really enthusiastic and we’re off to the races, now has got the bravery and the intellectual capabilities to say: ‘Hold on a minute. I don’t understand x x x.’” And if the look was blank, he said: “Go and find one – we need one.”

IW: If I can just extend that political message – we’ve just had the Liz Truss administration.

AR: Who was the ‘Hold on a minute” guy there? Good question!

IW: Exactly, Andrew, it was a case of: “So hang on. So we want to provide significant tax cuts. And we want to borrow. But we haven’t got specific tax-and-spend plans to explain to the international markets? Hang on a minute, have we thought this one through? There was no one there?

AR: Well, that’s because they’d sacked Tom Scholar at the beginning.

PL: Before we get too buried in that, I’m just going to hand over to Andrew Likierman for a final word.

AL: I just want to say I’m really pleased that we’ve focused on – and Ian started off with the question – the people here, the individuals. We can get rules changed, we can get institutions changed, but audit is conducted by people – real people whose understanding needs to be enhanced, if necessary, in terms of what they’re able to do, how effective they’re able to be. So for me, it’s as much about the people as about everything else. And I’m really pleased that we’ve had this discussion to identify that.

PL: Obviously, we’ll keep a watching brief on the future of audit as it progresses. You can keep up to date with developments in the sector by visiting the audit and assurance hub on icaew.com. You’ll find the link in the show notes.

In the next In Focus podcast later this month, we’ll be exploring the most effective ways to attract and retain talent in accountancy. And in March, the Insight series will return to review the contents of the spring Budget. Don’t miss those two.