Myles Thompson has represented the UK on the Board of Accountancy Europe for eight years. He is now the President of the organisation and has hit the ground running when it comes to developing its strategy.
Following feedback from its members – accountancy bodies from around Europe – Thompson and his team determined six critical focus areas for Accountancy Europe, including non-financial reporting, corporate governance and crucially, the future of audit and assurance.
As an experienced audit partner, Thompson is working to ensure the profession has consensus around how to take audit forward. We are likely to see some sort of regulatory change in the UK and the EU, but the profession also has to respond to the specific requirements of large, listed entities, other public interest organisations and the SME sector.
“We also have to take account of COVID. It will have an impact on the policies that the European Commission are thinking about. Will they push companies to really be radical on reducing their carbon footprint or will they hold off until companies recover from the economic impacts of the pandemic?”
Change and accountability
The audit profession wants to change, Thompson says. It wants to be accountable for what it does. There is a desire to improve audit quality and to be receptive to investor needs. Accountancy Europe has started work to explore these questions, starting with two papers: one on fraud and another on going concern.
“From a UK perspective, fraud was one of the key areas picked up by the Brydon Review,” says Thompson. “We’re dealing with a number of issues around fraud and the expectation gap between what auditing standards require auditors to do when it comes to fraud, and what they could do more of. How can we move forward in the future? And how could companies get better at managing fraud?”
Improvements in tackling fraud must start with the management and boards of companies. Who is accountable? Are adequate controls in place? Technologies such as big data and artificial intelligence can help auditors to identify patterns in the accounts, which could help prevent or detect fraud.
With going concern, auditors need to ensure companies are clear on what the key assumptions are that underpin their going concern assessment. “There are many good examples where auditors have flagged in the audit report that there were issues in this area. But how closely do people read the audit report?”
In its papers on fraud and going concern, Accountancy Europe is asking questions around what more the profession could do. The UK is more advanced in the development of some of these ideas due to the regulatory reviews undertaken by Kingman and Brydon. The challenge is to bring all countries up to the same level.
With these first two areas of exploration, if an entity has good financial controls over fraud and going concern, it could make a huge difference. Accountancy Europe is looking at how a framework might be developed to improve internal controls in these areas.
UK and EU Sarbanes-Oxley: a positive step?
Thompson believes that we are likely to see both a UK and EU equivalent of the US Sarbanes-Oxley Act (SOX) within the next few years. This will be a positive step, he says.
“Look at the research done on US companies since SOX has been put in. It took a while to embed itself. They made mistakes and we can learn from that. But despite those early mistakes, it has reduced corporate failure in the US. It has reduced the number of accounts that have been restated. It's reduced the number of corporate frauds. So you could argue it has worked.
“We’ve got to a time where that type of more stringent controls process for European corporations has got to happen.”
Another critical area which links to this is the question of how corporate governance is improved across all entities. Some harmonisation is necessary across Europe, says Thompson. One of the aims of Accountancy Europe is to ensure a level playing field when it comes to corporate governance.
There is also a need for a consistent approach when it comes to non-financial reporting. Standards must be consistent globally – it will not work if a multinational company based in Frankfurt has to meet differing standards in Europe, Asia and North America.
The profession has a role in helping legislators, regulators and standard setters to get the approach right and to define what role auditors might play in providing assurance on non-financial information.
“My personal view is that it is up to the market to decide on what assurance is required. We can do it, we've got the skills and necessary experience. We can provide assurance over all of these areas.”
Keep demonstrating the value of audit
As for the ongoing purpose of audit in the modern world, there has been a growing realisation of the real value of audit, says Thompson. “If audit works properly, it supports the whole process of the capital markets and how companies operate. An interesting thing that the failures have helped to show is how important it is for the auditor to get it right.”
The profession has got to be more transparent about what an audit is, and how it works, he says; make it clear what value that businesses get out of audit. It provides considerable benefits to entities and their boards.
We have got to keep on demonstrating the value of audit and the profession must be more transparent in what it does and how it works. We have got to become more accountable.”
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