- The report from the review into the quality and effectiveness of audit (Brydon Review) was released on 18 December
- This is the main independent government review in the UK and the most comprehensive review into audit conducted internationally in recent history
- The recommendations go to the very heart of what auditors do, how they do it, and who they serve
The UK has spent almost two years going through a protracted debate about breaking or disrupting everything to do with audit, with four major inquiries or reviews to date. All the previous inquiries or reviews have separately recognised the limited nature of their own scope as individual pieces of the puzzle and pointed to the Brydon Review as the one that will bring together different elements and address the underlying fundamental issues in audit. Poised to be incredibly influential in the UK audit reform process, and further afield, the UK government has signalled that they have been waiting for this report before deciding on any further steps.
The report contains a substantial number of recommendations, and cautions that any extension of assurance should be achieved proportionately where possible. Interestingly it specifically notes it is not clear that joint audits would improve the quality of audit in anything but the long term and, even then, with no certainty. Perhaps most importantly, it recognises that all the actors in the audit process bear some measure of responsibility.
One of the most significant recommendations is that the Government gives serious consideration to introducing a UK version of SOX, whereby the CEO and CFO make a controls attestation to the board. It also proposes some measures for greater clarity around the role of the audit committee.
It proposes the creation of a new ‘corporate auditing’ profession governed by principles, including the development of a specific auditor qualification and subject-specific auditors based on achievements from tailored education and training. This goes hand in hand with an extension of the concept of auditing to areas beyond financial statements, but leaving the decision-making power of which areas in the hands of those using and paying for audit services.
There is also a package of measures around fraud detection and prevention – clarity about roles, enhanced education, greater disclosure of anti-fraud measures taken, a fraud register and an independent sanctions regime – a combination of which should go a long way to restoring confidence in auditors in this area.
But this is to name just a few – there are many others which, if taken together, should achieve the objective of making audit more informative to users.
The impact on us
These areas of focus are highly relevant to the debate in Australia in relation to the Banking Royal Commission, wage payment issues and anti-money laundering breaches, and to the conduct and culture review in New Zealand. All challenges where the solution has to be a strengthening of accountability, systems and controls – the lines of defence serving to address risks facing businesses and consumers.
The timing of this report is particularly pertinent as the Australian Parliamentary Joint Committee inquiry into audit regulation is due to report by 1 March. The inquiry’s terms of reference overlap significantly with this UK government review, hence many of those who submitted to the inquiry suggested that Australia wait and see where the UK lands before taking any action. We submitted a comprehensive 15-point plan for audit and risk in Australia to the committee, and it is pleasing to see that the broad themes in the report are consistent with our plan.
The UK Financial Reporting Council (FRC) has also issued major revisions to its ethical requirements to strengthen auditor independence and prevent conflicts of interest. Auditors will now only be able to provide non-audit services which are closely linked to the audit itself or required by law or regulation to public interest entities they audit. This toughened approach is in line with point 1 of our plan.