On Tuesday, I was in Parliament giving evidence to the Business, Energy and Industrial Strategy (BEIS) Select Committee's inquiry into the future of audit, alongside Stephen Haddrill from the FRC and Maggie McGhee of the ACCA. You may remember that the Committee’s Chair, Rachel Reeves MP, launched this inquiry with a speech at Chartered Accountants’ Hall last November.
At the time we said we were keen to help in any way: I think the Committee has an important role in ensuring that the many recommendations emerging from the Kingman Review and the CMA market study – and the forthcoming Brydon Review – work together to constitute a coherent programme of reform.
My appearance was an opportunity to discuss some of the points we made in our recent written submission to the Committee and in our response to the CMA’s preliminary findings. This included our welcome for the strong and credible new regulator with enhanced powers put forward by Kingman, and our concerns about some of the CMA’s proposals, such as mandatory joint audits and structural or operational separation of audit and non-audit services.
As well as receiving written evidence from more than 70 organisations and individuals, the Committee has held five public hearings so far. They have questioned academics, investors, Audit Committee Chairs, the Big Four, challenger firms, professional bodies and regulators – plus Sir John Kingman and Sir Donald Brydon.
The inquiry is covering a lot of ground, and it would be impossible to summarise briefly all of the topics discussed, but the clear take-away is that this is a highly complex issue and that there is a tension between the requirement for further development and the need for urgent action to sustain public confidence.
But that’s the rub. Audit is under scrutiny from all sides. We are already knee-deep in ideas, proposals, recommendations and remedies - some of them quite radical. But few of them are ready for implementation: Kingman will require extensive public consultation; the CMA is some way off its final report, and Brydon expects to take most of this year to complete his review. Then there’s the requirement for legislation, which might not happen until 2021 given other parliamentary priorities. And beyond that, many of the measures under discussion could take several years to show results - in terms of changes to the structure of the market, for example.
We need action now
What I told the Committee - and have subsequently written elsewhere - is that the one thing we can start to change is the view of who is the ultimate client. We need to reinforce the point that it is not the company being audited. And we could start this cultural shift by ceasing to refer to them as 'the audit client'. We are all guilty of this – indeed I have been known to do it myself – but the firm is not the client. Shareholders and investors are.
But that is only the start. There are other, more concrete measures, that we can take. I would like to see auditors required to present at a company’s Annual General Meeting (AGM). Currently, they are not even required to attend. Of course many do, but it is not uncommon for an auditor to go through their entire professional career without ever having been asked a question at an AGM. This presentation could be supported by one from the company’s own internal auditors. Internal audit is another vital part of a company’s governance structure, and yet often has little visibility.
Thirdly, I would like to see an increased emphasis on section 501 of the Companies Act – this is the legislation that makes it a criminal offence to provide misleading information to auditors. Greater focus on this would reinforce the obligations that executives and directors have to give auditors all the information they need.
These measures would not address all of the problems of audit - clearly we also need to deal with issues such as concentration in the market, oversight, quality, and scope. But they would demonstrate that the profession is taking this seriously and recognises that there is a trust problem and an expectation gap.
We’ve long been calling for a bold intervention to restore confidence in audit - and taken together, these various reviews should eventually result in a comprehensible programme of reform. We will continue to work with all parties to develop practical and sustainable recommendations to tackle all of the issues at hand. But there are some things we can start to do now. And we should.