Brydon audit review: Sector demands ‘less talk, more action’by
Sir Donald Brydon’s year-long review into the future of audit landed at the end of 2019 and having spent the festive period chewing over the 138-page document along with their turkey, experts are split over how realistic the proposed fixes are.
To the surprise of no-one, the report proclaimed “urgent reform” necessary and suggested separating Britain’s audit sector entirely from the accounting profession as an immediate fix to stop a repeat of such scandals as the collapse of Carillion, retailer BHS, bakery Patisserie Valerie, and travel agent Thomas Cook.
Eschewing the popular view of the sector’s general health in the wake of so many large-scale failures, Lord Brydon said he believed “audit is not broken but it has lost its way”, and recommended a series of remedies including auditor transparency, targeting corporate fraud and further powers for shareholders to grill auditors at annual investor meetings.
He added that auditing should take the public interest into account, rather than simply applying a tick-box approach to financial statements. However, the most significant aspect is his call for audit to be split from accounting.
“Auditing is too important to be left to an adjunct of another profession: it should be an independent profession in its own right, with its own governing principles, qualifications and standards,” the review said.
Action, not just words
The main focus of the Brydon review was on the quality of audit provision for FTSE 350 companies, but some of the recommendations, including the creation of a new audit profession distinct from accounting, will undoubtedly impact the market as a whole, said Steve Gale, head of audit at Crowe.
“The radical nature of some of the changes that are proposed in this review, as well as the CMA review and Kingman Review that preceded it, should be welcomed for their attempts to make changes that makes audit fit for the future,” said Gale. “It is critical that this time, unlike with some of the past reviews, that we have action, not just words.”
Also pointing to the other probes, Phil Verity, senior partner at Mazars, said he was pleased the report reflected the importance of auditors in society.
Verity said Mazars felt application of “a core set of principles”, as proposed by Brydon to be established by new regulator the Audit, Reporting and Governance Authority, would help attract and retain the best talent to the sector along with driving up standards.
The sector’s reputation has been tarnished by such high-profile failures, and experts believe the work of many small and medium auditing firms is ignored or brushed over with the focus on a small number of bad apples that have triggered multiple investigations into the auditing and accounting professions.
“The new government now has in its possession three clear, credible and authoritative reports, which together form a framework for the future of audit,” said Verity. “The Competition and Markets Authority’s proposals strengthen resilience and competition in the audit market, Sir John Kingman’s review of the FRC addresses regulatory oversight, and now Lord Brydon’s report sets the tone and aspirations for the future of the industry.”
He said the “roadmap is complete”, and it is now incumbent upon the business department to “grasp the opportunity for profound and lasting reform”.
“The rigour and quality of audit work must be held to the highest possible standard,” added Nigel Bostock, chief executive of Crowe. “The audit process is too integral to the proper functioning of society and the economy for anything less to suffice.”
Pick one or the other and stick with it
Splitting both audit and accounting may also flush out senior figures who possess one set of skills but not the other, experts said.
“The problem with the Big Four is that many of the partners who have advanced by being professional auditors are not experienced in the basics of accountancy,” said Ian Smith, financial director and general manager at automated accounts payable and document management software provider Invu. “Accountancy is about recording, classifying and reporting. Auditors tend to take a top-down approach worrying about classifying and reporting rather than recording.”
He said a clear example is the case of the interim finance director appointed at Patisserie Valerie, after the accounting errors and potential fraud, were reported, who endured difficulties reconstructing the recording of invoices in accounts payable despite previously clean audit reports.
Smith said this suggested a lack of understanding of the basic recording of transactions rather than a need to be trained in audit only, and was endemic in Big Four work.
“You could argue that the errors in the well-reported cases, Patisserie Valerie and Carillion as well, show a lack of basic accountancy skills rather than a lack of audit skills,” Smith said.
Smith also took issue with Brydon’s “public interest” audit recommendation, stating he feels there is already too much to report on.
“Rather than extending the audit into reporting on every ‘new thing’ politicians think up around the rather vague term the public interest, they should get back to basics and just report on the balance sheet, profit and loss and cash flow,” Smith said.”
Rise of the robots
The main thing we can expect in 2020 on the back of so many government probes into audit bungles as technology advances at such pace is disruption, said Smith.
“The bots are coming! Many of the audit tasks carried out today can now be automated,” said Smith. “The lesson of many of the failures seems to be that audit has focussed on what is there, rather than what is missing. AI may help here, but I suspect that the commercial skills required to spot the discrepancies will lead to a need for audit partners to only reach that level after working a couple of years in industry, excluding banks, investment businesses or government.”