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The Brydon Report and the critical significance of its conceptualisation of audit

Author: ICAEW

Published: 29 Jan 2021

29 January 2021: The Brydon Review presents several opportunities for the profession, but the critical starting point is to embrace its conceptualisation of audit, says Professor Christopher Humphrey as part of a series of articles based on themes from ICAEW’s Audit Manifesto.

Professor Chris Humphrey was on one of the advisory boards for the Brydon Review, so is somewhat closer to it than most. He believes it offers a huge opportunity for the profession. Of most importance here is its reframing of the scope and purpose of audit in terms of helping to build and maintain deserved confidence in the company, its directors and the information it makes public, including the financial statements. 

This creates the chance for the profession to develop the audit function into something with a social purpose that meets the expectations of the modern era. For Humphrey, much of what is recommended in the Brydon report builds from this definition. It makes it vital when people are discussing the future of ‘audit’ that they are very clear that they are talking about audit in this broader form and not its traditional, more restricted definition concerned with the truth and fairness of the company’s financial statements.  

This is potentially one of the biggest problems facing the pursuit of audit reform, namely that it is very easy, because of the statutory financial audit’s long-established history, for people to drift back into traditional representations of audit.  

Their overall framing of the discussion can be very broad but with closer inspection, the realisation develops that audit is still being considered in very restrictive terms, with the tendency for audit to be defined by what it is not rather than what it can become. 

“There is an evident tendency nowadays for people to talk of the importance of a holistic reform intent regarding audit.  This is very difficult to argue against, as the opposite of holistic invites terms such as ‘restricted, limited and narrow-minded.  However, there is a real risk that the commitment to holistic reform will lead to reform of everything but audit. More regulation, more inspection, more audit market reforms, bans on the provision of certain services by auditors but little, if any, innovation or development in audit itself.”  

Humphrey says there are some signs of this in the way in which discussions around the development of formal ‘audit and assurance policies’ seem to be centred on the expanding nature of various new ‘assurance services’ and treating the statutory financial audit as fixed and given. 

But, as Humphrey points out, a switch in conceptual thinking can quite easily present a very different status for audit.  If you start with the presumption that audit is a subset of assurance services, the scope for audit to innovate is very limited; constrained as a secondary function. “A secondary function is dependent on what it verifies. If you flip that and consider that assurance is a subset of audit – some forms of audit could be about information assurance, some about performance improvement or value for money – audit suddenly becomes a more adaptive and dynamic phenomenon.” 

Humphrey sees the broad spirit of the Audit Manifesto as being very consistent with a number of things in the Brydon report, but stresses that “a key thing is to make sure something starts to change, but it is also very important as to the manner in which you pursue and contemplate change”. 

Here, he again sees the importance of making sure that the conceptual foundations on which audit reform is being pursued are solid.  “I see much agreement in the need for a strong regulator and much expectation that once this is established so much more will follow. However, do the roots of a strong profession really depend so centrally on the existence of a strong regulator? How much more important is the knowledge that the professional function you are providing is strong, sound and widely acknowledged and respected for its economic and social purposefulness – and not plagued by concerns that it is misunderstood or misconceived?”.  

Clearly, there are risks to any function that has been associated historically with the notion of an ‘expectation gap’ in seeking to expand or develop its remit but, as Humphrey stresses, such risks need careful consideration and analysis, rather being left by default because they are too complicated or systemic.  “If we sidestep key conceptual issues, they will come back in a haunting manner, most probably when the next set of major corporate collapses breaks, and questions are asked as to how such things happened under the watch of a much bigger and more powerful regulator?”.  

In discussing Brydon’s conceptualisation of audit, Humphrey focused on the notion of deserved confidence and its significance as being a social and moral concept, rather than a statistical one, he says. “If you think companies are not performing in a way that really is deserving or meriting of confidence, that can extend not just to the credibility of their financial statements, but to the nature of their products, their business model and their impact on the environment and wider society.” 

Sir Donald Brydon has spoken publicly about the unique and privileged insight that auditors have of the companies they are auditing, and it is this type of conceptual reframing that serves to open up the capacity for auditors to utilise such insight to broader effect and purpose.  

Humphrey stresses that deserved confidence was not just something dependent on the work of auditors but was a direct responsibility of directors and the way they choose to run the company. He highlights the importance of recommendations in the Brydon report relating to the resilience of public interest statements and to remind about the dangers of building control systems and regimes on generic presumptions of distrust.  

This raises important questions as to the adaptability of audit and the importance of moving beyond representations of ‘an audit is an audit’. “Stakeholders associated with a company could demand a more forensic oriented audit because they've really lost trust and faith in that company,” he says. “Particularly if you're also worried about cybersecurity breaches. You may need something that is in essence premised on distrust. In that case, auditors would investigate in a much less amicable fashion.” 

However, if you have a company that is decent with a stable business track record and socially well regarded, it is likely to gain more benefit from an audit function that is conceptualised in more enabling and developmental terms.  “My students keep asking in all of these proposed regulatory reforms relating to audit, including those advocating SOX based assessments of internal control, what is there for a decent company that wants to be better? Why not just replace directors who cannot be trusted? Can we not look at audit as a function that is able to vary in purpose and philosophy, to be more tailored to the circumstances of the business and society - and, through this, enhance the broader economic and social value of audit.  Surely, in today’s big data era, this has to be a live possibility?”  

The current COVID pandemic is going to provide many cases of previously well-performing companies with sound business models who have been hit hard by the disappearance of high street trade.  

“They are likely to see much more value in an audit that helps the business to get back on its feet again rather than one that affirms that their large financial loss is accurately stated. If we are really committed to ‘building back better’, then we need seriously to contemplate what role auditing can play in facilitating the development of better and more socially sustainable businesses?” 

In this regard, Humphrey stressed the importance of the Audit Manifesto’s emphasis on design principles and the importance, for his students, of this extending to the way in which accounting firms providing auditing services operate and of creating career paths where many more students chose to pursue a career in auditing rather than seeing it as just a training ground for other types of professional accounting work.  

He emphasises how all of this goes right back to the critical nature of the way in which audit is conceptualised.  “If audit is kept in its traditional straitjacket, then talk of a new distinct, corporate auditing profession is far less attractive. If the current accounting profession embraces Brydon’s conceptualisation of audit (and the broader vision as to what auditing can do that logically builds from this), then the prospects for a new corporate auditing profession are massively different. Who knows, we may even start talking more seriously about an ‘audit eco-system’ than just a financial reporting eco-system.”  

“For those who see the development of a new corporate auditing profession as not so much of an immediate priority or see it as something that can be addressed by a few tweaks to the professional accounting qualification framework, I would ask them, at least, to review their particular conception of audit and assess both its functional competency and its consistency with the current commitment to a manifesto for change”. 

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