The UK government-backed review has called for the creation of an independent audit profession with a revised purpose to increase confidence and prevent unnecessary corporate failures.
Sir Donald Brydon, appointed in January 2019 to review the quality and effectiveness of audit, has proposed substantial changes to the sector in the United Kingdom, including strengthened standards for auditors, more responsibilities for company directors and additional powers for shareholders and stakeholders to influence audit.
The Brydon review is the last of four reviews, including the Kingman Review to reform the Financial Reporting Council (FRC), to publish its recommendations and marks out a path for reform.
The review considered how the audit process and product could be developed to better serve the needs of users and the wider public interest. It proposes a new definition of the purpose of audit as well as the creation of a new “standalone and transparent” profession.
The final report makes 64 recommendations and includes:
- A redefinition of audit and its purpose to reflect the public interest
- The creation of a standalone and transparent audit profession
- Clarification that auditors should seek to find corporate fraud and a requirement they are educated in forensic accounting and fraud detection
- Improved auditor transparency
- New powers for shareholders to influence audit
- Additional reporting requirements for directors
- A responsibility for directors to explain the actions they have taken to prevent material fraud and to report on internal controls
The recommendations are aimed primarily at the audit of Public Interest Entities (listed companies, and credit and insurance firms) in accordance with the Review’s terms of reference.
The 138-page review recommends a new definition of the purpose of an audit, drafted as helping to “establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements."
Sir Donald said this would “reinforce audit as a public interest function that demonstrates more than just compliance with laws and rules, helps its users know how confident they can be in the audited information and, by extension, those who have produced the information."
Further proposals include replacing existing going concern and viability statements with a resilience statement incorporating a going concern opinion for the short term, a statement of resilience in the medium term, and a consideration of risks to resilience in the long term. There is also a recommendation that directors present an annual public interest statement.
AIA chief executive Philip Turnbull said “As a Recognised Qualifying Body (RQB) for statutory auditors AIA is committed to ensuring auditors are trained to the highest possible standard and properly equipped to undertake their important role. It is vital for the public interest function that audit demonstrates more than just compliance with laws and rules. Sir Donald’s review highlights improvements that recognised bodies can make to the training of auditors and we will work to incorporate them into recognised qualifications and training.”
An FRC spokesperson said: “The FRC will study Sir Donald Brydon’s report with interest. Many of his recommendations, if accepted by the government, will have significant implications for the FRC in respect of our activities and resource requirements.”
Sir Donald Brydon’s report can be accessed here.