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Audit market: From recommendations to reforms

09 July 2020. Published by Davina Given, Partner

The Brydon Report on audit quality and effectiveness was released on 18 December 2019.

The Report sets out recommendations for “urgent reform” in order to increase public confidence and seek to prevent unnecessary corporate failures. It builds on two previous inquiries into the sector – the Kingman Review of the Financial Reporting Council and a market study conducted by the Competition and Markets Authority. The government must now turn a wide range of recommendations into a holistic package of reforms which will shape the future of audit.

Why does it matter?

Reform has been on the horizon for several years, following a succession of high-profile corporate collapses linked to perceived audit deficiencies. There is recognition throughout the industry that reform is necessary. It is now a question of what and when reforms will be implemented. The Brydon Report contains some bold proposals with the potential to fundamentally change the way audit functions in the UK. These include:

  • creating a standalone audit profession (as distinct from accounting), with separate governing principles and training requirements;
  •  imposing additional duties on auditors to detect fraud eg by requiring them to exercise ‘professional suspicion’ (as opposed to scepticism);
  •  greater transparency in terms of remuneration and profitability from audit work; and
  •  new reporting requirements for directors and more opportunities for shareholders to hold directors and auditors to account.

These proposals add to the (already far-reaching) recommendations of previous reports, including the operational split of audit from provision of consulting services and the possibility of joint audits. These reforms would be relevant to auditors of any size, as well as firms throughout the accountancy sector.

Meanwhile, pending formal reforms, the FRC is pressing on with its plans to ringfence audit practices from other parts of professional services businesses, which the FRC considers will contribute to an increase in audit quality.

Reforms will have implications for any business subject to audit requirements, as well as their directors and shareholders. There is likely to be an increased focus on the role played by all the directors of a company and the need for the whole board to be accountable.

However, given the Government are currently tackling the impact COVID-19 as well as dealing with Brexit this year, it may well be that the auidt market reforms could be delayed.

What actions should you take?

  • There will be a greater emphasis on forensic accounting (to detect fraud) – consider additional training for auditors to meet new standards.
  • Directors should review and improve their company’s internal controls in anticipation of greater scrutiny from auditors, regulators and shareholders, and check whether D&O policies will extend to personal liability they may face.
  • A split of audit and consulting would create opportunities for firms outside the Big Four to keep monitoring developments as to the final structure of audit businesses to take advantage of potential opportunities.

This summary forms part of our annual Regulatory Radar – an overview of the key regulatory changes you need to have on your radar, from audit reform to HMRC's focus on corporate criminal liability and IR35 plans.

Click here to read more.