FUTURE OF AUDIT IN UK 2020

2020 is an exciting year for the UK’s audit industry owing to the efforts of many dynamic thinkers devoted to its reformation. Following the likes of Sir John Kingman and the CMA, Sir Donald Brydon published his final report on audit reform in December 2019, containing a total of 64 proposals aimed at refining and revitalising the profession of audit in the UK. Here are nine key elements of the Brydon report which make it both innovative and practical in the long run.

REDEFINING THE PURPOSE OF AUDIT

One of the most significant contributions of the Brydon report lies in its strict articulation of the auditing profession’s purpose: creating and sustaining “deserved confidence” (p.22) through the provision of “decision useful information” (p.24). Hence, Brydon not only emphasises the need for auditors to establish a credible and trustworthy environment for their users, but that the way to do so is through knowledge that is helpful, more than anything else. Investors need to know WHY they should or should not make certain decisions in the future, and equipping them with information that is unambiguous, honest, and intended for their benefit is the path to obtaining their trust.

CLARITY OF EXPRESSION GOES A LONG WAY

In keeping with audit’s purpose to provide useful and trustworthy information to its users, Brydon makes an important suggestion about the need to reword certain misleading clauses of the Companies Act, thereby improving their implementation. He stresses most thoroughly the replacement of “true and fair” with “present fairly, in all material respects” (p.58), arguing that claiming absolute truth to one’s findings is in itself a bias. Where auditors are encouraged to be objective facilitators to their investors, it seems almost absurd, as Brydon suggests, to portray one’s results as free of anything but the truth. Instead, he encourages auditors to adopt a more humble alternative, demonstrating that their work has been produced to the best of their ability (which leaves room for the possible consideration of inevitable errors), thereby “strengthen(ing) the value of that opinion” (p.58). Another example of a similar amendment he proposes is that of substituting the obscure phrase “adequate accounting records” with a specific and targeted alternative (p.60). The report therefore places the user’s understanding of the information as a precursor to making use of and relying on it.

PUBLIC INTEREST IS THE KEY FOCUS

The report maintains inclusivity as it takes into account not just shareholders as the direct beneficiaries of audit work, but also other users including stakeholders, customers and possible investors. Therefore, the redefinition of audit’s purpose in the Brydon report caters to the interests of the larger public, calling for published information to have not just clarity of the utmost degree, but also the occasional flexibility in including “original information” if necessary for transparency (p.24). It therefore encourages auditors to keep the aforementioned purpose of audit in mind while reporting their findings, reminding them that public interest should never be compromised out of fear of the outcome. In fact, Brydon goes a step ahead in recommending that “this obligation should be extended to material outside the Annual Report that is used in investor presentations…” (p.26), thereby enhancing the role of both, corporations’ and PIE’s responsibilities in ensuring that the public has access to maximal information, as is their due right.

BROADENING THE SCOPE OF CURRENT AUDIT

Brydon highlights a very common yet overlooked issue regarding the interchangeability of ‘audit’ and ‘statutory audit’ in our current diction (p.27). He argues instead that there is a significant difference between audit as a much broader concept and statutory audit which is linked solely to a company’s financial statements, claiming that the latter is merely a part of the former whole, while also stressing the importance of non-financial audit (p. 49). Building upon the various forms of auditing other than financial, such as environmental and cybercrime, the Brydon report calls for the Audit, Reporting and Governance Authority (ARGA) to ensure the specialised education and training of these non-financial auditors. Furthermore, this new arrangement would ensure that only financial auditors will need to be certified accountants (p.32).

CORPORATE AUDITING AS A BRAND NEW PROFESSION

Brydon makes a rather commendable recommendation about establishing corporate auditing as an entirely distinct profession, with its own professional association, and ARGA as its regulatory body (p.31). This is a highly valid suggestion because contrary to popular belief, not all accountants are authorized auditors; in fact, auditors require more advanced forms of training including sharp inspection skills in order to qualify for their position (p.27). Moreover, making corporate auditing a profession in its own right ensures a considerably wider scope for various kinds of audit as discussed above. It can host a variety of specialisations, attracting more and more newcomers to the field, while awarding the profession its own unique identity instead of letting it lie under the accounting umbrella.

A DISTINCT QUALIFICATION

Building on the above, the Brydon report also suggests that ARGA devise a “specific auditor qualification” (p.37) along with a carefully tailored education and training program. It puts special emphasis on inculcating forensic accounting techniques into the curriculum, allowing auditors to aptly exercise suspicion, as opposed to mere scepticism, when required (p.36). At the same time, Brydon also suggests the development of post-graduate courses for auditing in the UK, referring to the likes of Germany, Jordan and Chile (p.37). Designing a curriculum unique to the audit profession will pave the way for many talented individuals, presenting a significant opportunity especially for auditors who are not trained accountants.

GREATER INVOLVEMENT OF THE PUBLIC

The Brydon report prioritises the users of audit, not just in terms of the protection of their interests, but also in deeming their input valuable enough for effectively transforming audit. In this regard, the report calls for the Public Interest Disclosure Act to enable communication between the workforce and a primary auditor by including the latter in its list of “prescribed persons (p.90), thereby allowing workers to voice concerns related to the company i.e. risk factors. Such a system, according to Brydon, should also be implemented within companies, holding them accountable to employees regarding whether and how they responded to the former’s concerns, if any (p.56). With reference to the PIDC, Brydon also recommends extending the Act to allow other beneficiaries such as customers and suppliers to raise issues related to the company with the auditor in charge (p.90). However, it does not end here. The report stresses not just companies’, but also audit firms’ accountability to the public. Brydon calls for a platform of productive discourse by suggesting the establishment of the Audit Users’ Review Board (AURB), allowing users to give constructive recommendations to ARGA on further improvement of audit (p.53). In this respect, he also suggests that a “formal confidential mechanism” be developed by ARGA to hear out investors’ issues related to the auditor and/or the nature of an audit, without any compromise (p.104).

STRENGTHENING THE ETHICAL BACKBONE

Since a strong moral foundation constitutes the essence of the auditing profession, the Brydon report suggests the development of the Principles of Corporate Auditing as a distinct framework to guide the actions of auditors and maintain topnotch standards of performance (p.33). Moreover, the report suggests that this set of rules should be formulated along the lines of the ISBA and FRC’s ethical guidelines (p.35). Along with recommendations like maintaining objectivity and sidelining any personal gains, corporate auditors are advised to do everything necessary to make their reports easy to understand for the user, while maintaining maximum integrity and transparency in their work.

IDENTIFYING AND RESPONDING TO RED FLAGS

Part of effective audit is being able to identify warning signals ahead of time, which is why the Brydon report suggests that ARGA create a list of such cues, allowing auditors to be prepared in advance and begin their investigation (p.72) instead of waiting for shareholders to express concerns first. This is where the application of professional judgment (p.37) will be indispensable to the audit profession. As far as companies are concerned, Brydon suggests that directors maintain the utmost transparency about their payment policies and practices with their shareholders i.e. their compliance with the Payment Practices Reporting Duty (PPRD), allowing the latter then to identify any possible concerns regarding the company’s viability (p.89). Finally, Brydon also recommends that directors issue statements about their company’s future based on three distinct time periods (short, medium, and long terms) as opposed to the standard three year interval (p.81). This approach would enable a company as well as its users to be more conscious of possible risks to its sustainability in the long run, and address those risks promptly.

CONCLUSION

Despite mixed reactions, it is evident that the proposals within the Brydon report are comprehensive and far-reaching. ACCA endorses Brydon’s suggestion to establish ARGA as the main regulatory body for the UK’s accounting and audit profession “as soon as possible”, stating that such a move is “of fundamental importance”. Although the government has already begun its work on making ARGA a reality, it is still unclear whether or not other extensive proposals in the report, such as the establishment of a new audit profession, will be furthered. Regardless of the implementation of these proposals in the future, in Brydon’s own words, “(even) if we can change the mindset in that period, it would be a huge achievement.”

References

1.      Brydon, Donald. “Assess, Assure and Inform: Improving Audit Quality and Effectiveness.” The Independent Review (2019). pp. 22-104. Web. GOV.UK. Published 14 Feb 2020. https://www.gov.uk/government/publications/the-quality-and-effectiveness-of-audit-independent-review

2.      “ACCA Comments on Sir Donald Brydon's Report on Future of Audit.” ACCA, https://www.accaglobal.com/gb/en/news/2020/january/acca-comment-brydon-future-of-audit.html . Accessed 16 Feb 2020.

3.      “The Brydon Report on Audit Is Out, So What Do Key Stakeholders Think of It?” ACCA, https://www.accaglobal.com/uk/en/member/member/accounting-business/2020/02/practice/brydon-stakeholders.html . Published 12 Feb 2020.