Get audit reform done, profession tells BEIS
Initial reaction among the profession to Sir Donald Brydon’s radical recommendations for shaking up audit and making it fit for the future, has been welcoming.
“This is an important moment for audit,” said KPMG chairman and senior partner Bill Michael. “We recognise that the expectations of audit – and of corporate reporting – have evolved over the years.
“Sir Donald’s review is an important milestone in setting out how audit might better meet stakeholder needs both now and in the future.”
None of the commentators disagreed with Sir Donald’s conclusion that audit needs to be transformed into a service that meets the expectations of UK stakeholders.
ICAEW chief executive Michael Izza described the proposals as “bold” and game-changing for the accountancy profession. “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.”
He welcomed Sir Donald’s recommendations for making the whole board of directors accountable and called for the government to bring forward legislation to establish the new more powerful regulator, the Audit, Reporting and Governance Authority (ARGA), “at the first opportunity”.
Grant Thornton head of quality and reputation Jonathan Riley wanted the government to take a wider approach.
“These recommendations should bring far greater clarity and transparency to the profession and ultimately result in an audit regime that allows auditors to better assess, assure and inform all users of financial accounts…
“Crucially, the government must now consider these recommendations not just in the context of earlier inquiries into the profession, but also against the backdrop of global trade and Britain’s future role as a pillar of global commerce.”
Some of the larger audit firms were keen to point out that they had been making changes to raise the quality of their audits. Michael said that changes at KPMG “demonstrate how serious we are about rebuilding trust in our profession and the excellence and independence of our audit practice”, while a PwC spokesperson said that the firm had been “working hard” to enhance the quality of its own audits.
“As a firm, we are committed to playing our part in introducing changes which improve audit quality, help rebuild confidence in audit and the corporate reporting system and ensure that the UK remains a leader in audit,” they added.
EY’s head of audit Hywel Ball welcomed the focus on the public interest, stakeholder reporting and director accountability.
“We believe the review will play an important role in ensuring the audit profession is able to continue to serve the evolving needs of business, investors and the public interest,” he said.
“We continue to believe that the right set of comprehensive changes is needed to enhance protection for UK pensioners, employees and investors.
“We remain committed to playing an active and constructive role in the development of the proposals and all the interconnected reviews into corporate reporting and audit.”
Stephen Griggs, Deloitte deputy CEO and managing partner for audit and assurance and public policy, welcomed Sir Donald’s “bold vision”. “There are challenges to audit firms and the wider profession around how we can go further in terms of transparency, independence and communication. A future audit product and market can be built around these.
“A consensus around what an audit does, and doesn’t, do and whose purpose it serves has been long overdue. These recommendations would settle that debate and go a long way to repairing trust in business, strengthening the audit profession and improving the overall quality of UK financial and corporate reporting.”
The so-called challenger firms were even more enthusiastic. Grant Thornton’s Riley said that it was the right time to explore what changes are needed “to ensure that audit is fit for modern day business and meets the public interest”. The report, he added, should “contribute heavily towards this outcome”.
Scott Knight, head of audit at BDO, welcomed Sir Donald’s “thought-provoking contribution” and predicted that “a number of far-reaching proposals” set out in his report “could position the UK at the vanguard of financial reporting and associated assurance”.
Mazars senior partner Phil Verity thought the report offered a successful balance between radical thinking and practical solutions.
“In particular, we are pleased that our belief that auditors play a critical role in society is reflected in the report. We believe that a corporate auditing profession applying principles of corporate auditing will help to attract and retain the best talent, while driving up professional standards.
“In addition, we strongly support the proposed extension of audit beyond the financial statements to encompass ESG, cyber, controls and culture. Applying clear and consistent measurement of these factors will have a profound impact on businesses and society, and auditors are ideally placed to lead this shift.”
As for those who are the subject of audits, “the broad thrust of the Brydon Review report is on the money”, said Roger Barker, head of corporate governance at the Institute of Directors (IoD).
Pointing out that four in 10 of IoD members “have expressed doubt about the effectiveness of statutory audit in providing meaningful assurance that the accounts of major companies are fair and accurate”, he also welcomed the proposed widening of the scope of audit to cover disclosures beyond the financial statements.
“Company reporting on issues such as governance, environmental risks and social impact are increasingly important to shareholders and other stakeholders,” he continued. “External auditors can help rebuild trust in business by offering independent assurance on the robustness of these statements.
“Meanwhile, the amount of dividends paid to shareholders has been a controversial issue in several recent corporate collapses. We are therefore supportive of the review’s recommendation for auditors to oversee the justification of these pay-outs.”
Summing up, Mazars’ Verity added, “The new government now has in its possession three clear, credible and authoritative reports, which together form a framework for the future of audit.
“The Competition and Markets Authority’s proposals strengthen resilience and competition in the audit market, Sir John Kingman’s review of the Financial Reporting Council addresses regulatory oversight, and now Sir Donald Brydon’s report sets the tone and aspirations for the future of the industry.
“The roadmap is complete, and it is now incumbent on the Department for Business, Energy and Industrial Strategy to grasp the opportunity for profound and lasting reform."
Originally published in Economia on 19 December 2019.