Placing audit reform at the top of the agenda
Audit reform must be placed at the top of the agenda if we are to restore public trust in the profession, writes ICAS Executive Director of Standards, Michelle Mullen.
To seek the truth
Those words have power, but they also bring responsibility.
In 1854 a group of Edinburgh-based accountants established a Society based on their common knowledge, skills and values. The roots of the profession were planted by a few for the benefit of society. They chose as their motto the words “Quaere Verum”. This motto still embodies what it means to be a CA today. Whilst the knowledge and skills of a CA might be those of business, this is still a profession that has made a promise to society.
Against that background, public trust in our profession is being challenged by the same issues that are challenging society, such as business behaviours, audit quality, equality, diversity and inclusion, sustainability, and economic growth. The COVID-19 pandemic and global economic uncertainty have simply added new challenges to this list.
Some say trust is a measurement of competency and ethics. I have heard others describe it as a measurement of competency, ethics and narrative. I am the first to admit that ICAS does not always comment publicly on certain issues, but that doesn’t mean that we don’t have a point of view. Sometimes ours is a quiet influence. However, I recognise our leadership on sector-wide issues is important to members, and we could do more to highlight the areas where ICAS is using its voice to help shape the future of business, the profession and, perhaps also, society.
Audit reform is moving back up the political agenda this week, as ICAS responds to the BEIS Parliamentary Committee’s call for evidence. The corporate failure narrative has never waned, or at least it feels that way every time I see another headline. Auditors have an obligation to call out materially misstated information, or any information which is materially inconsistent with the financial statements. Auditors are not responsible for corporate behaviours.
Everyone recognises that more needs to be done. Audit quality is improving but it is clear from the recent FRC reports that this quality needs to be more consistent. The firms set high standards for themselves and they have committed to making the necessary investments and improvements, but neither the profession nor the audit firms can do this alone. Increased competition should be encouraged and welcomed, but similarly it is not the panacea. There will, I hope, be a new role and purpose for audit in the near future, with increased reporting requirements, but we also need to see the implementation of a more robust directors’ enforcement regime, as proposed by the Kingman Review, possibly aligned with the early adoption of the proposed UK Internal Controls Statement and Resilience Statement.
Increased public trust in audit is going to need a wider holistic suite of reforms, and I would suggest this now needs to be delivered to a much more aggressive timetable.
The COVID-19 pandemic has placed the audit profession back in the spotlight; many believe it has increased the risk of fraud and for many businesses it raised questions of going concern with added complexity for preparers and auditors alike. We will now need to wait and see if the regulator reviews the 2020 audits with the benefit of hindsight.
We expect a further public consultation on the audit reform agenda before the end of the year, and over the coming weeks ICAS will be re-examining the key aspects of the reviews undertaken by Sir Donald Brydon, Sir John Kingman and the CMA. Clearly implementation of the full list of recommendations is a mammoth, and frankly impossible, task but there are certain key recommendations which could offer a coordinated way forward that encompasses corporate governance, corporate reporting and audit (notably, in that order).
Last week ICAS responded to the HMRC call for evidence on raising standards in the tax advice market. This has been a long-standing and thorny issue for our small and medium-sized practices, but at its heart this should be about consumer protection. In the UK there is currently no restriction on the provision of tax services – anyone can offer them. In contrast, ICAS practitioners need to be deemed competent to offer these services, maintain their knowledge and skills through annual CPD activities and of course hold professional indemnity insurance. Why should those standards not apply to all tax agents? It will come as no surprise that ICAS believes the long-term aim should be to require that all tax agents are both qualified and regulated. HMRC will have a number of priorities over the coming months, but the very publication of this call for evidence is a step in the right direction.
Ultimately, both of these reforms will benefit society. They will improve the business ecosystem and help provide better foundations for the future.