To achieve this goal, the industry must work together to drive a comprehensive audit reform programme, together with the implementation of the Competition and Markets Authority’s proposed measures. The time to do this is now.
We have outlined a number of detailed proposals in our recent submission to the Brydon review into the quality and effectiveness of audit: below are some of the key priorities in our vision for the future of audit:
1. A new qualification of Chartered Auditor should be established
To recognise the high level and distinctive skills required by auditors, a new qualification of Chartered Auditor should be created. Consideration should also be given to establishing a Society of Chartered Auditors under the auspices of the main professional bodies currently able to grant Registered Audit status.
2. Independent body needed to ensure auditing remains responsive to the needs of its stakeholders
Given the crucial role of audit in ensuring confidence in information provided to our capital markets it needs to be kept under review on a regular basis beyond the life of the Brydon Review. A body led by users of audit should be established to keep issues under review related to the scope of audit and to trust in auditors. The body should be demonstrably independent of the firms and the relevant professional bodies. In addition to looking at current improvements, there is also a need to consider longer term changes made possible by modern technology such as a system of continuous reporting and auditing.
3. The future of auditing cannot be considered separately from the future of reporting
The future of auditing cannot be looked at separately from the future of reporting as it is the financial statements which are subject to audit and if there is not confidence that they provide a true and fair picture of the performance and position of the business it is very unlikely that assurance on them will be highly regarded. A far more joined up approach to looking at reporting and auditing issues together is needed at both a UK and global level.
4. Auditor’s role in relation to detection of fraud should be reviewed
We believe the auditor’s responsibilities in in relation to the detection of fraud are reasonably clearly set out. It would be helpful to have a review on how they are being fulfilled in practice and whether more could be done. Any extension of responsibilities would probably best be left to discussions with investors, in particular, on whether they thought they should be extended and, if so, whether they would be willing to bear the likely extra cost. Alternatively, internal auditors could increase surveillance in this area.
5. Major review of audit standards needed
There is also a need for a thorough review of auditing standards. We believe a move towards a system which places the primary emphasis on the application of principles, accepting there may be a need for some specific requirements would be beneficial. The current ‘rule book’ approach to audit is fostering the ‘commoditisation’ of audit at the expense of providing additional value to the users of the audit report.
The audit reform programme needs to get underway without delay. Whilst we regard it as important that the various parts of the audit reform package (CMA, Kingman and the Brydon Review) are seen as an interlinked package, the other parts of the package do not need to be held up pending finalisation of the Brydon Review.Changes in the scope of audit would be perfectly compatible with a reformed market structure in which there was joint audit for most FTSE350 companies, as recommended by the CMA following their thorough review. Such a system of joint audit in the FTSE350 would contribute to the sharing of best practice in audit across the market, increase market resilience, provide a level playing field between different firms and, through the additional live review of audits involved, enhance the overall quality of audit.