Date posted: 6/05/2019 2 min read

Audit: Where is it all heading in the UK?

Have your say on the future of audit.

In brief

  • The UK Competitions and Market Authority (CMA) has published a final report for its statutory audit market study
  • The UK Parliament Business, Energy and Industrial Strategy (BEIS) Select Committee has issued its report on the future of audit
  • Sir Donald Brydon has published a call for views in relation to his review into the quality and effectiveness of audit.

April has been a busy month for audit reforms in the United Kingdom, with three major reports produced that could have  important ramifications in Australia and New Zealand. There is a lot going on and it can be hard to make sense of. This article gives a rundown on the key happenings, what it means here, and how you can feed your views into Chartered Accountants Australia and New Zealand’s advocacy and engagement.

During April:

  • The UK Competitions and Market Authority (CMA) has published a final report for its statutory audit market study.
  • The UK Parliament Business, Energy and Industrial Strategy (BEIS) Select Committee has issued its report on the future of audit.
  • Sir Donald Brydon has published a call for views in relation to his review into the quality and effectiveness of audit.

I wrote about these three reviews in December 2018, as well as the Kingman Review which focused on UK regulation of audit. The UK Government has since taken forward Sir John’s review and is now conducting an initial consultation on the recommendations. 

Future of audit inquiry

In its report, the BEIS Committee called for the CMA to aim for a full structural split of audit and non-audit services within the Big Four, a segmented market cap and the use of joint audits for FTSE 350 companies. It welcomed the CMA’s proposal to increase regulatory oversight of audit committees, but recommends that if this does not work, independent appointment of auditors by the regulator should be considered.

It agrees that the UK Financial Reporting Council (FRC) needs replacing with a new statutory body -  the Audit, Reporting and Governance Authority (ARGA) and recommends that the Government introduce the necessary legislation in the next session of Parliament to establish ARGA. It also welcomes the possible introduction of a strengthened framework around internal controls on a similar basis to Sarbanes-Oxley.

The BEIS Committee supports the fundamental rethink of audit that Sir Donald is undertaking. It encourages consideration of how the scope of audit might be widened to give auditors more opportunities to express forward looking opinions and to report on more issues affecting stakeholders.

CMA market study

The CMA's final recommendations are not too dissimilar to its preliminary report, which I wrote about in December:

  • An operational split of audit and non-audit services within the 'big 4'. This will require a separate CEO, board, financial statements and remuneration.
  • Mandatory joint audits for the UK's largest and most complex companies whereby a 'challenger firm' works alongside a 'big 4' firm.
  • Regulation of UK companies' audit committees to ensure they provide adequate scrutiny of their auditors.
  • The regulator should review the effects of these changes periodically, in the first instance five years from full implementation.

The UK Government has committed to responding to the CMA's recommendations within 90 days.

Brydon Review

The most exciting of these developments is the Brydon Review. Literally everything is on the table. Brydon is taking “a back to basics approach combined with an imaginative forward look”, and “an open-minded approach to questions about the purpose of audit, its social usefulness and the extent to which it fulfils users’ legitimate demands”, whilst being “mindful not to discard what is good in the search for what is better”. 

We have been engaged with the review team at a staff level and during his recent visit to the UK CA ANZ President, Stephen Walker met with Sir Donald.

The Brydon Review is also the one most likely to have ramifications outside the UK including here in Australia and New Zealand. The UK pioneered the extended auditor reports, and the rest of the world followed. Once again, the world is watching, and the UK Government’s instructions are clear; “change is long overdue, … we need action”. 

It is vital that we engage and provide our Australian and New Zealand perspectives – to do this we need your input. Sir Donald has published an initial consultation paper with comments due 7 June. We would greatly welcome views and ideas from members on the questions raised which you can email to submission.feedback@charteredaccountantsanz.com