Brydon review consults on fundamental overhaul of audit process

Plans to overhaul the audit market have gathered pace with the launch of the government’s public consultation into the quality and effectiveness of audit, looking at the fundamentals of the audit process, purpose and scope, led by Sir Donald Brydon. Sara White reports

Brydon has now set out the terms of the initial consultation for the independent review, commissioned by the Department for Business, Energy & Industrial Strategy (BEIS) and funded by government, calling for evidence from key stakeholders with a view to overhauling the audit market, and the findings will shape government policy on the future of legislation and standards, and could lead to a rewrite of the Companies Act 2006. This is likely to be phase one of a multi-pronged review of the audit framework and it will make recommendations to government once completed.

This review comes at the same time as the ongoing Competition & Markets Authority (CMA) investigation into audit dominance by the Big Four, and the Kingman Review, which has resulted in the imminent disbanding of the current audit regulator, the Financial Reporting Council (FRC) and replacement with a new oversight body, the Audit, Reporting and Governance Authority (ARGA).

The Brydon review has a wide remit to assess whether the scope of audit should be extended to include detection of fraud, auditor liability and audit’s role in relation to directors’ legal responsibilities.

It will also focus on the purpose of audit, whether its scope and purpose should be widened and strengthened to meet changing expectations of audit and the quality of the audit process and potential improvements.

Brydon will also look at the quality and effectiveness of current auditing standards, and the definition of audit under ISA (UK) 200, which defines the purpose and scope of an audit. It is also prepared to consider amending the Companies Act 2006 to provide greater clarity about the purpose of audit.

It also wants to gauge views on whether fraud detection should be part of the audit framework, which is one of the key areas for concern as the wider public expects this to be part of the audit, but it has never been a statutory requirement of audit. Brydon is keen to explore whether the audit framework should be reviewed to include ‘an expectation that the auditor will have actively sought out any evidence of fraud’.

There are also concerns about the interpretation of accounting standards with criticisms of the valuation of goodwill and other intangible assets where auditors have failed to challenge management and directors. Recent corporate failures highlight instances where such assets were subsequently shown to have little or no value, and market valuations at the time of the audit had correctly anticipated this. This reflects either a lack of appropriate scepticism by auditors in assessing the valuations or their being willing to back down in the face of pressure from management to do so. 

Concerns about a lack of management challenge are frequently highlighted in the FRC's annual audit quality inspection (AQI) reports, often highlighting the poor relationship between auditors and their listed clients.

Continuing corporate failures and criticism of auditors has forced the government to review the audit market, with calls to potentially break up the Big Four firms and hive off their audit practices into separate entities to reduce conflict, open up competition to mid-tier audit firms through the use of joint audits, and ultimately introduce swingeing reform of the audit framework to try to restore public confidence in the value and effectiveness of audit.

The independent review will examine the existing purpose, scope and quality of statutory audit in the UK, in order to determine:

a) the needs and expectations of users of financial and non-financial corporate reporting;

b) how far the audit process and product may need to improve and evolve to meet the needs of users and to serve the wider public interest;

c) what specific changes to the statutory audit model and wider regulatory framework for audit may be needed to deliver this, including any changes to company law;

d) whether other forms of business assurance should be developed or enhanced to enable shareholders and other stakeholders to assess better the future financial prospects and sustainability of companies.

Review chair Sir Donald Brydon added: ‘I am clear that this Review must demonstrate an open-minded approach to questions about the purpose of audit, its social usefulness and the extent to which it fulfils users’ legitimate demands.

‘I anticipate that there will be further Calls for Views and the need for deeper research as I develop conclusions. The present Call is neither exclusive nor exhaustive and further topics will be explored in due course. For example, at this stage the Review is not examining in depth the consequences of changing technologies, nor is it attempting to reconcile UK and global practice.’

Earlier attempts by the CMA’s predecessor through the Competition Commission investigation in 2011 attempted to address the competition issue in the audit market but this did not produce the expected results with no signs of non-Big Four firms breaking into the listed audit market.

The subsequent EU Audit Regulation and Directive in 2016 helped to make 10-year audit tender rules mandatory, while the non-audit services (NAS) cap has resulted in increased tender activity, albeit with most FTSE audits flipping between the Big Four. Mid-tiers firms have benefited from some of the fallout from the NAS cap with an increase in non-audit related business for listed entities.

This consultation closes at 5pm on 7 June 2019.

Open consultation, Brydon review - The quality and effectiveness of audit issued 10 April 2019

Report by Sara White

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