Audit forensic accounting finally takes centre stage in audit reforms

Audit failings blamed for collapse

The Conservative Party’s Manifesto set out the party’s aims for audit reform within the following statement: “We are also strengthening the UK’s corporate governance regime, and will reform insolvency rules and the audit regime so that customers and suppliers – and UK taxpayers – are better protected when firms like Thomas Cook go into administration. We will also carefully study the results of the ongoing investigation into its collapse.”

Sir Donald Brydon’s review dated December 2019

On 18 December Sir Donald published his 138-page report into audit reform.  His terms of reference were set by the Government at the beginning of the year and included the ambitious aim of “seeing the UK at the forefront of corporate governance internationally. This includes maintaining a leadership position internationally in terms of the evolution of the audit”.  

Sir Donald’s report also includes over 60 other wide ranging and ambitious recommendations, including strengthened standards for auditors, more responsibilities for company directors and additional powers for shareholders and stakeholders to influence audit.   

Sir Donald proposes that the new generation of auditors should be trained in audit forensic accounting and in fraud detection.  So, while the higher standard will require auditors to approach their work with suspicion rather than just scepticism, by targeting their work using their audit forensic accounting skills perhaps we will have better outcomes without increasing fees prohibitively.

The Business Secretary’s priorities

In her editorial for my Institute’s newsletter, Economia, just before Parliament was dissolved in November, the Business Secretary, Andrea Leadsom, asserted that:

“Reform will cover not just the function of the regulator, but also the purpose and function of audit itself. It will include proposals on the function and oversight of audit committees and new internal control arrangements within our great British businesses – key lines of defence against poor corporate governance. It will also include proposals on the responsibilities of boards and directors – who need to build trust in the business activities that they lead. And reform will also look at how both investors and regulators can better hold companies and their auditors to account. All of those factors must be assessed and weighed together, so that the whole package is coherent and effective.”

She ended be stating her aims to be: “I want to see the UK leading the world in the next phase of improvements in corporate governance and audit reform.”

The challenge ahead

There has always been an “expectation gap” between what the public expected and what auditors delivered. Like many accountants, I spent my early years as an auditor before concluding that adding forensic accounting skills to my toolbox would allow me to make a much greater contribution in business.  While I applaud the introduction of audit forensic accounting training for auditors, and the need for them to approach their work with suspicion rather than mere scepticism, introducing these changes will require huge effort by regulators, trainers and the new firms themselves.

Some of Sir Donald’s recommendations may be implemented relatively early but others, such as creating a separate audit profession with its own governing principles, standards, and professional qualifications is a big step, and will take time to implement, and require a lot of work with the inevitable cost falling on business. 

In our interconnected world, any changes introduced in the audit of major UK companies will need to be mirrored in other major economies if UK auditors are to be able to meet these new standards.  The UK will need to encourage the accountancy professions in other countries to adopt these proposals as well.

In addition to Sir Donald Brydon’s review, the Business Secretary has three other major reviews on various aspects of the profession to address – the future of the Financial Reporting Council (Sir John Kingman), reform of the audit market (Competition and Markets Authority) and the future of audit (the Department for Business, Energy and Industrial Strategy’s own Committee).

The Business Secretary certainly has her work cut out if she is to implement these ambitious aims in the next 12 months.  As always, the devil will be in the detail and I suspect we will see more limited reform within this timetable, leaving the more ambitious aims for another day.

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Charles Lazarevic

20 December 2019

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