In December 2019, Sir Donald Brydon issued the report Assess, Assure and Inform: Improving Audit Quality and Effectiveness.
The report, produced in response to an extensive consultation carried out in 2019, includes close to 100 recommendations on a range of matters with the overall aim of improving the quality and effectiveness of audit. While the focus of Brydon’s work remains firmly on audit, many of his recommendations make reference to corporate reporting (as well as other areas such as corporate governance). Although there isn’t space in this short blog to pick out every aspect that may directly (or indirectly) affect corporate reporting, I have outlined below some of the main recommendations in Brydon’s report that have a corporate reporting angle.
It is also worth bearing in mind when reviewing the list below that most of the recommendations in Brydon’s report have been made with public interest entities in mind.
Brydon recommends that a ‘Public Interest Statement’ should be included within the Strategic Report. This statement would, among other things, explain how directors view the company’s legal, financial, social and environmental responsibilities to the public interest.
Currently, directors of public interest entities include information on principal risks and uncertainties within the annual report. Brydon argues that it would be preferable for shareholders to have the opportunity to consider the latest ‘Risk Report’ before the audit committee has endorsed any plan for the next audit. Brydon suggests, therefore, that directors publish a ‘Risk Report’ prior to the audit committee meeting at which the scope of the next audit is determined and endorsed.
Brydon also considers the company law requirement for financial statements to give a ‘true and fair’ view and contemplates the challenges that arise when this term is interpreted in a purely literal sense. Overall he concludes that the concept of (and use of the term) ‘true and fair’ creates confusion. His recommendation is that company law and and ISA (UK) 700 replaces ‘true and fair’ with ‘present fairly, in all material respects.’
The report recommends that company law is changed to require audit fees to be shown on the face of the profit and loss account.
There is much detail in Brydon’s report around accounting records and internal controls. Very broadly, he recommends that company law is improved to give more clarity as to what is meant by ‘adequate accounting records’ and suggest that serious consideration be given to strengthening the UK framework around internal controls over financial reporting.
Brydon also recommends that directors publish a Resilience Statement replacing the existing Going Concern and Viability Statements. The Resilience Statement would incorporate a going concern opinion for the short term, a statement of resilience in the medium term, and a consideration of the risks to resilience in the long term.
Although no formal recommendations on capital maintenance are made in the report, Brydon has taken the opportunity to make several suggestions. For example, he suggests that directors, when proposing a dividend, should be required to make a statement that the payment of this dividend in ‘no way threatens the existence of the company in the ensuing, say, two years in the light of the risk analysis undertaken.’
He also suggests more rigorous procedures in cases where it is likely that distributable reserves are deemed ‘similar’ in size to a proposed dividend, for example, a requirement for the distributable reserves to be subject to audit in this circumstance.
Brydon also recommends that directors report to shareholders on their company’s payment policies and performance and that this be subject to some level of audit.
ICAEW will be considering Brydon’s report over the coming months and the need for guidance for members. A government consultation on implementing the recommendations is expected in the Spring.
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