Audit needs to change, and reform is in the pipeline. The past year has seen a steady stream of reviews and inquiries into audit, the structure of the market and its regulation. Sir John Kingman, the Competition and Markets Authority (CMA) and the House of Commons Business, Energy and Industrial Strategy (BEIS) Select Committee, have all asked useful and productive questions, which ICAEW has welcomed and to which we’ve responded.
The last – and perhaps most fundamental – of these reviews is Sir Donald Brydon’s Review into the quality and effectiveness of audit.
This was the review that we had long been calling for – an examination of the very scope and purpose of audit itself, looking at the expectation gap and how the audit product needs to evolve in order to address it. The expectations of investors and other stakeholders have rightfully increased in recent years and audit needs to keep pace.
In April, Sir Donald launched his call for views, to which we recently provided a comprehensive submission – drawing together input from a diverse range of members, from a wide variety of firms and locations across the UK.
User-Driven Assurance Model
We are recommending consideration of a radical new three pillar model of User-Driven Assurance, to be directed by the needs of the primary user – the shareholders. This would comprise a range of assurance outputs, demanded and delivered as and when appropriate, and could involve multiple providers. This would of course require significant effort to develop and implement, but could be an effective way of meeting the needs of all users – and finally and fully closing the expectation gap.
The first pillar should be an improved version of the statutory audit product for shareholders, with a renewed focus in several areas – avoiding disorderly failure, fresh thinking on fraud, better audit reporting and championing proportionality.
The second pillar would be provided by a range of other assurance engagements – such as skilled person reviews - which are already widely required or commissioned by government departments, regulatory bodies and other third parties, and for which ICAEW plays a leading role in developing guidance.
The third pillar would be a significant empowerment of shareholders through new voting rights, enabling them to require the commissioning of assurance on a flexible and discretionary basis.
Developing such a model may require the exploitation of new technology and revision of the liability regime. There may also need to be changes to UK law, which should define rigorously the purpose and nature of the core statutory audit, but remain flexible regarding the other assurance engagements.
We are ready to work with the Review to develop this concept further, and are well-placed to facilitate the discussion and collaboration that would be necessary to fully realise it.
Improving the core product and regulation
We believe that the core audit product for shareholders – the statutory audit – remains essential, but must be improved to address the delivery gap. Our response makes several suggestions for changes to statutory audit.
We also stress the importance of applying Better Regulation principles, and state that a rigorous impact assessment of the package of reforms – from all of the reviews taken together – is essential. The expected benefits must be carefully identified in order to justify the likely costs to business.
As a major professional body, we are acutely aware of our own role and responsibilities in ensuring the future quality and effectiveness of audit. This includes equipping our members to meet both current expectations and new ones that will arise from these reforms – to a high professional and ethical standard. We continue to encourage and contribute to the policy debate by supporting and responding in detail to each of the audit reviews.
For more information, you can read our full response to Sir Donald’s call for views on our website.
Sir Donald will submit his report by the end of the year, on which we expect a further opportunity to comment. I hope that he will embrace fundamental change rather than incremental reform. This is an opportunity to tackle the key challenges in a coherent, comprehensive and conclusive fashion, which will help to restore trust in audit.
For more on this and other matters, please follow me on Twitter @MichaelIzza.