The Brydon Report - Assess, assure and inform

The title of this article is the tagline of the final report by Sir Donald Brydon that was published in December 2019. The purpose of the Brydon Report was to improve audit quality and effectiveness, which is aptly summarised in a quote from The Guardian of April 2019.  Referring to the failures of Carillion and Patisserie Valerie, The Guardian commented that, “[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 …” and all that jargon? Surely everybody knows that? Don’t we all agree?

Unfortunately not Sir Donald. 

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

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 always thought.

Other notable concepts from the above proposed purpose are:

• “confidence in the company … its directors and … information” – not only the financial statements, also the company itself.
• “including the financial statements” – more information, not only the financial statements?

At the moment, 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.

But now it is recommended that auditors also include in their reports any new information that they become aware of, 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.

For example, an auditor may find during the audit that management is rather, to put it politely, “optimistic” in their estimation of values of assets but the financial statements try to paint a conservative culture. The auditors should not be afraid to draw attention to that inconsistency.

The auditor should also report the influence of external signals on the audit plan. Is the industry experiencing negative customer sentiment about its products? Is new technology threatening the company’s services? Explain how the audit plan took that into account. 

Speaking of technology – Sir Donald points out that advanced analytics can reduce the reliance on sampling, therefore if auditors still find the need for sampling they should explain the reasons and sampling basis in their audit reports.

The part of the audit report that we are familiar with, the conclusion on fair presentation in the financial statements seems safe for the time being but the auditor should be prepared to give more context to specific findings. Key audit matters are already reported to express work done and conclusions reached on these key matters, but the recommendation is that the auditor should provide more insight into the findings, i.e. don’t just say that the estimate of impairment is reasonable, but also if it’s on the conservative or aggressive side. These are referred to as “graduated findings”, as opposed to a binary finding of reasonable/not reasonable.

Sir Donald also believes users would gain valuable insights into audit quality if they understood more about how the audit product is delivered. Details of the number of hours spent on the audit by grade of audit staff member would aid in this understanding, he argues.

Other details that should be added in the audit reports could include any “anxiety” about the resilience of the company, alternative performance measures published in the financial statements and an audit opinion on the KPIs (key performance indicators) used to determine directors’ remuneration.

It’s not only the auditor that should be more transparent according to the report. Directors, specifically audit committees, should also be prepared to add a public interest statement, report on their actions to prevent and detect fraud, explain any debates between management and the auditors (even if resolved), publish audit committee minutes (suitably redacted) and their audit and assurance policy and risk report. The latter should be published in good time before the audit committee meeting to allow shareholders to provide input into the audit plan.

One of the debates between management and the audit partner is about audit fees, which is obviously not a healthy situation. The recommendation is that only the audit committee chair should be allowed to negotiate fees, and then it should be only with a dedicated department in the firm, not with the engagement partner.

But 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, will also 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 difference areas, combined with the ability to provide assurance, and the final report will be signed by a corporate auditor, who may or may not be qualified as an accountant.

The above are just some of over sixty recommendations contained in the Brydon Report. Not all of them are that far-reaching and some of them have already been implemented in South Africa. But most of the recommendations are thought-provoking, at the very least. Watch this space for exciting future developments.

Henk Heymans
Head of Audit, Johannesburg

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