Christmas has come early for all earnest followers of the current debate around the future of audit, with the publication, some weeks earlier than widely expected, of the Brydon report on the quality and effectiveness of audit. Running to 138 pages, the report is lengthy and ambitious in scope and will take some time to digest fully. Nonetheless, here is our summary of its findings and recommendations.
Sir Donald Brydon had been briefed to look in particular at the audit of public interest entities (PIEs) though in practice a lot of his recommendations will be inextricably linked to the wider work of audit firms, since there are no firms that audit only PIEs.
Brydon’s recommendations vary significantly in their level of detail and challenge. There would be considerable extra work for ARGA, the regulatory replacement for the FRC, and some new responsibilities of directors, but the bulk of the burden rests on auditors, who would be required to do a range of extra work and to report on any additional information produced by the directors.
Although the seven pages’ worth of recommendations do not follow a consistent set of themes, they could be grouped into the following areas:
Audit purpose and a new audit profession
Brydon does not conclude that audit is broken but that its purpose is not clearly understood. So he recommends that a guide to audit is written in plain English, explaining what work is performed in an audit and what the components of an audit report mean.
Brydon also recommends creation of a separate and distinct ‘corporate auditor’ profession, with qualifications being required for different types of audit, and Principles of Corporate Auditing governing their work.
Changes to the audit report
Brydon considers that the term ‘true and fair’ is poorly understood and should be replaced with ‘present fairly, in all material respects’ within company law. He favours retaining a binary opinion rather than a graduated opinion, but suggests expanding what auditors are asked to include in their audit report, to cover ‘original information, materially useful to a wide range of users’, even if this has not been mentioned in the accounts, and to comment on material that is published outside the accounts - for instance, investor presentations and RNS announcements.
Brydon also wishes to enhance continuity between successive audit reports, including calling out inconsistencies in public information.
The audit report should also make explicit comment on whether directors have complied with their s172 responsibilities. It should also give information on details of the audit work including the number of hours spent on the audit by each grade of staff.
Where the recommendations ask the directors to prepare new reports, eg the Public Interest Statement and Resilience Statement, auditors would be required to report on these.
Fraud and the audit
Auditors would, under Brydon’s recommendations, be required to demonstrate ‘suspicion’ which appears to be stronger than professional skepticism and involves a more forensic approach to the work (including more training in fraud awareness). ISA (UK) 240 should be enhanced so that an auditor is obliged ‘to endeavour to detect material fraud in all reasonable ways’.
Work required of directors, shareholders and others
Brydon encourages directors to present shareholders with a three-year rolling ‘audit and assurance policy’ setting out their approach to auditor appointment, fees etc. He suggests that Strategic Reports should include a Public Interest Statement and that the directors should prepare a ‘Resilience Statement’. Directors should also provide an annual statement around the effectiveness of internal controls over financial reporting, and that this would be subject to audit following any disclosed failures.
Companies would be required to put in place a mechanism allowing stakeholders including employees to raise issues with the auditor, to allow shareholders more say in what the audit covers and to enhance whistleblowing provisions.
Work for regulators and other bodies
ARGA would be responsible for implementing a number of the recommendations above and would be advised by a new ‘Audit Users Review Board’ comprising solely users of audit reports. It would have to establish an independent ‘Auditor Fraud Panel’ and develop various pieces of guidance about situations where auditors would need to report or investigate further.
Brydon makes a number of other recommendations on aspects such as the use of technology in audits, liability limitation agreements and transparency measures.
Brydon suggests a number of items that would require company law to be changed. These include a new requirement to disclose audit fees on the face of the profit and loss account, a change in the companies act definition of the purpose of an audit, and changes to the auditor resignation process.
The Government would also be required to review and improve the whole Companies Act including clarifying what is meant by ‘adequate accounting records’.
The FRC has responded to the publication of the Brydon report, saying that it would study it ‘with interest’. The proposals in the Kingman, CMA and Brydon reviews will take some time to implement in full (in particular those requiring primary legislation to be enacted). As a final recommendation, Brydon suggests that a follow-up review be conducted in 2025 to consider how the three reviews have been implemented.
A final touch of welcome whimsy
The final appendix to Sir Donald’s report contains a poem, taken from a 1951 edition of the Accounting Review but said to date back to the 1930s, which ‘demonstrates how many of the same criticisms have been levelled against audit for more than 80 years.’ Here it is:
The Accountant’s Report
We have audited the balance sheet and here is our report:
The cash is overstated, the cashier being short;
The customers’ receivables are very much past due,
If there are any good ones there are very, very few;
The inventories are out of date and practically junk,
And the method of their pricing is very largely bunk;
According to our figures the enterprise is wrecked....
But subject to these comments, the balance sheet’s correct.