The Audit Manifesto sets out a blueprint for reform
29 January 2021: The profession was already reforming itself before Brydon, but now is the time to ramp up change, argues ICAEW President David Matthews as part of a series of articles based on themes of ICAEW’s Audit Manifesto.
I find it hard to believe that anyone in accountancy or audit isn’t interested in the subject of audit reform. I was an auditor for 30 years, and while I no longer work in audit, I’ve spent so much of my career within it, how can I not be invested in its future?
When you look at the criticism that has been levelled at the audit profession in recent years, fairly or unfairly, it naturally causes self-reflection about what we can do better and some personal angst that is hard to reconcile with when you set out to do the best job that you can.
There continues to be a lack of understanding about the work that auditors do and the function that it serves, but that does not mean that we should not look closely about what we do now, and what we could do in future.
Audit has a very specific purpose. It has changed little over the years, but the reality is that business is changing. It is becoming more complex, and technology is transforming how companies store data and record transactions. The audit opinion, as it stands, is simple, stating that the accounts give a true and fair view of the financial results and position of the business – although over the last few years we have seen some expansion in the content of the report which is to be welcomed. We have some narrow definitions as to audit’s responsibilities in relation to going concern and fraud in particular.
Increasingly, stakeholders have been saying: “that’s not really what we want.” We in the profession need to be more open-minded in considering the changing needs of stakeholders.
The focus of audit, as with company directors, is moving away from being solely in the interest of shareholders towards a broader group of stakeholders. We have always known that our work is of some use to other people; what are auditors’ responsibilities with regard to their needs as well?
Auditors cannot adapt in isolation; they are part of a chain that includes others where each of these elements must be equally strong, or the whole chain fails. Preparers, oversight bodies, regulators, investors and even legislators could be seen as part of that chain. All of these must work together to deliver reform in a way that really serves the interests of all stakeholders, including the general public.
But in the first instance, we need to focus on what’s under our immediate control, in the absence of other initiatives. We need to outline everything that we need to do to make a difference, and it’s here that the Audit Manifesto becomes critical.
It helps to address some of the ideas put forward in the Brydon Review; the Five Principles of the Manifesto align with those ideas and gives the profession a framework for adaptation. They also reflect the ICAEW Code of Ethics, so its foundation is strong.
In truth, the audit profession was moving in this direction before the Brydon Review and the push from government for legislative change. We were already moving steadily away from the binary ’true and fair view’ towards an approach that brought in additional information to provide the level of granularity that investors were crying out for.
That started with factual elements such as materiality, things that were in scope, errors of audit judgement, but it gradually expanded to include ‘the extended audit opinion’, giving the auditor’s views. Investors have really appreciated this because it provides the colour that they cannot necessarily get from looking at a figure.
These have been small steps, but they’re in the right direction. I can see the pace of change increasing as part of the wider reform agenda; the talk of auditors contributing at AGMs, for example. As long as we maintain a reasonable basis for questioning and understand the liabilities - we want to have a sustainable system – these are all promising steps.
There are other elements of reform that are more challenging. We’ve had a proliferation of auditing standards and guidance that have increased the technical requirements; audit firms both big and small have had to respond to that. Then there are behavioural skills and the need for professional scepticism. Back in my audit days, I thought I was pretty sceptical, but how much is enough? How deep do you go? There’s a balance to be struck, and it all comes down to judgement. Unless you go through everything, you will always have some residual risk.
We also need to think about how we instil in our auditors the confidence to engage and challenge in a way that elicits a professional and coherent relationship. With any well-managed company, it’s going to be a much more effective process if there’s a professional approach on both sides, with both accepting challenges and working together to reach the right conclusion. It shouldn’t feel like a process forced upon them by the auditors against their wishes.
Again, this is where the Audit Manifesto gives us a roadmap for the direction of travel. Particularly in terms of investing in training and development to ensure that individuals develop the right personal skills and ability to exercise good judgement.
All of this is before we get into the potentially expanded world of audit, beyond the financial accounts and KPIs and into the non-financial information that has become so important to investors. We will have to build all of these things into that new world as well. A lot of the skills that we have are going to be equally applicable to non-financial information, even if we might not be experts in the underlying subject matter.
As a profession, we need to take a consistent approach to all of these challenges. ICAEW needs to work with all of the participants in the corporate reporting chain to help address some of these issues. It’s the right time to address them and to adapt.
The business environment is becoming more complex, but that brings with it a number of opportunities for the audit profession. For a long time, audit was seen as a commodity. Now, people have started to recognise it as a really valuable product, provided by skilled experts.
Responding to changing stakeholder needs ought to instil not just confidence, but trust and recognition of the value and skills that audit provides. This, in turn, will attract new people to come into the profession and strive to live up to those standards. It is, potentially, a virtuous circle.