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Changes to audit are about transparency, and transparency presents opportunity

When company failures attract media attention, one of the first questions that is often asked is: ‘Why didn’t the auditors warn us?’ Around the world the profession has been stuck in a cycle. Regulators respond with new policies, companies change auditors, auditors explain the remit of their role, and the fundamental offering remains the same. This isn’t surprising - consistency is something that auditors need to be absolutely committed to, but societal expectations on businesses are changing. It’s time to get ahead of those changes.

Wells Fargo in the US, Tongaat Hulett and Steinhoff in South Africa, and Carillion in the UK, led regulators around the world to ask about the scope of audit and the role that it is meant to play. While some steps have already been taken in the form of Sarbanes-Oxley, the questions are still being asked, and at the end of 2019, Sir Donald Brydon released a report summarising his independent review into the quality and effectiveness of the audit sector in the UK.

The Brydon Report

The purpose of the recent Brydon Report was to explore ways to improve audit quality and effectiveness, which is aptly summarised in a quote from The Guardian of April 2019 which refers to the failures of Carillion and Patisserie Valerie: “[The auditors’] failure to spot the fragility of those businesses resulted in the loss of jobs, savings, pensions and tax revenues.”

As an auditor, my rather defensive response to the above was that it has never been my job to spot the ‘fragility’ of anything. My job is to ‘gather evidence … that the financial statements are fairly presented …’ etc. Surely that is something that we all understand and agree on?

Unfortunately, not Sir Donald. 

He was only the most recent voice in a list of esteemed individuals and bodies in the UK and elsewhere that had a long and hard look at the established role of the auditor, including Sir John Kingman, the Competition and Markets Authority and the BEIS Select Committee.

Sir Donald recommends that the entire purpose of an audit be changed. According to him, the purpose of the ‘new’ audit should be to ‘help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements.’ He makes it clear that the primary responsibility for establishing confidence in a company is still that of the directors, but the auditors clearly have a much broader role to play here than we have previously thought.

Currently, directors prepare financial statements and the auditors express a conclusion on those financial statements. If something is required by the standards or law to be disclosed, the directors will do it. If they don’t, we ask them to do it or we qualify our report.

What are auditors being asked to do?

It is recommended that auditors now also include in their reports any new information that they become aware of, or that they think may be useful. There is still no obligation on auditors to find new information, but they invariably use a lot of information in the conduct of their audit and, if they believe any of this is useful, they should include it in their reports. They would obviously give the directors an opportunity to do so first.

However, the purpose of the audit is not the biggest proposed change. The report also proposes that the scope of the audit be widened to include much more than the audit of financial statements. The new profession, the ‘corporate auditing’ profession, would include consideration of other subjects like culture, environment, social and governance, cyber, controls, etc. The audit team will comprise of individuals that are qualified in all these different areas, combined with the ability to provide assurance, and the final report will be signed-off by a corporate auditor, who may or may not be qualified as an accountant.

The idea that audit should be looking beyond financials isn’t a new one, and the debate around environmental accounting especially is one that has been driven by societal pressures in recent years. While the Brydon report is the latest example of pressure to change the way audit works, it certainly isn’t the first and it will not be the last.

Key takeaways for business owners

The biggest takeaway from the report is to expect change – it is coming, sooner or later, in terms of the role and expectation of audit. People want to know that the companies they interact with are operating in a way that aligns with their moral outlook.

How exactly this will be implemented remains to be seen and will vary country by country, but businesses who get used to sharing more are going to reap the rewards in the long run. Audit is about gathering evidence, and the changes to our industry are being driven by people expecting transparency. Embrace transparency and explore ways that your company can use that transparency to engage with your customers. Embrace the reality of what the new numbers tell you and, if you don’t like them, tackle them honestly. Audit is about gathering evidence, and that evidence can be used to achieve real change.This is an exciting time for audit and there are changes coming that will affect businesses big and small. Watch this space, the transformation is far from over.