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Cogs turning | AccountingWEB | Balance must be struck with audit reform
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Balance must be struck with audit reform

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Amid fresh calls for audit reform – despite the issue being seemingly off the political agenda ahead of the general election – sector specialist Julia Penny believes a balance is needed between quality performance and finding people willing to do the job.

26th Jun 2024
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Conversations around audit reform have picked up pace recently on the back of the industry facing several challenges over the past 12 months and being placed under significant scrutiny.

This is despite the issue seemingly being off the agenda, having not been mentioned across the political parties’ manifestos and being omitted from the King’s Speech late last year.

In March, the Institute of Chartered Accountants in England and Wales (ICAEW) revealed it had given evidence to the Business and Trade Committee on the challenges of making changes to audit and corporate governance. ICAEW managing director Iain Wright subsequently spelled out what he thought needed to be done.

Urgent priority

Now, the Institute of Chartered Accountants of Scotland (ICAS) has called for the next government to “urgently prioritise” such reform to “restore trust in business and protect people’s livelihoods”.

Chief executive Bruce Cartwright stressed that it’s “too important to wait and incur even longer delays on this crucial issue of public trust”.

“It’s been six years since the collapse of Carillion, followed by another major failure at Patisserie Valerie,” he said. “And despite agreement across political parties, businesses and the accountancy profession that reform is needed, we have yet to see any real effort to tackle these issues.”

Last week, we reported that the increasing focus from regulators on raising standards has caused some small firms to abandon audits, having found themselves unable to cope with the demands and complexities imposed by regulatory requirements.

Power to take action

Speaking to AccountingWEB, JS Penny’s Julia Penny – who has more than 30 years of experience providing services across auditing, financial reporting and anti-money laundering regulations – has backed the calls for reform.

“In my view, one of the most important elements of this is for the regulator to have the power to take action against company directors regardless of whether they are a member of a professional accountancy body or not,” she said.

“At the moment, you have the absurd position that directors, both executive and non-executive, of companies resign their membership of their professional body because they can be fined and sanctioned to a much greater extent than non-members of a professional body, and yet membership of such a body brings with it obligations for continuing professional development (CPD) and compliance with ethical codes.

“This is surely a desirable feature in our company directors and yet we have a direct disincentive to continue to be a member of a professional body for company directors.”

Understanding human behaviour

Penny noted that the uncertainty of having a regulatory system “which has been supposed to be changing for years and has been gearing up for these changes with increases in cost”, both direct and indirect, is “not helpful to either quality or competition – both key aims of the regulator”.

“In my view, the regulatory system needs to understand more about human behaviour and the unintended consequences of a regulators’ actions to get the best out of the system.

“For instance, the FRC was heavily criticised for being a weak regulator so understandably got more robust and issued very hefty fines, but what has that done for the attractiveness of audit? We have had fewer people wanting to stay in audit and recruitment difficulties are starting to be seen.

“A balance is needed, because we must have quality, but we must also have people willing to do the job.”

Hanging around for years

While Penny is behind the push for reform, she doesn’t think the word “urgent” is quite right.

“This has been hanging around for years,” she said. “It really can’t be urgent, but it can be important. It is certainly a topic of conversation in the profession, but given that we are soon to have a general election, it is difficult to imagine that legislation for audit reform is going to be top of the list.

“In fact, I hope it isn’t as I believe there are far more important areas to sort out for our economy and wellbeing in the UK.”

Penny stressed that since the calls for reform started around the time of the Carillion collapse, “a lot has already been done to rebuild trust, including more robust audits, which companies have no doubt discovered cost more than the audits that were done previously”.

“The increasing availability of powerful technology including AI [artificial intelligence] can help to drive audit quality and efficiency even further.

“Perhaps we really are entering a brave new world of audit, with more human attention on the tricky bits and more computer attention to the vast numbers of transactions and the dull, routine testing that many audit juniors will be familiar with.”

Working well but not perfectly

Penny believes that overall, “audit works well”, albeit “not perfectly”.

“I am constantly reminding auditors of the things they need to get better at – professional scepticism fills the top spot – and how they might do this, like better understanding why the human brain doesn’t like to be sceptical.”

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