Opinion Piece on BEIS Committee recommendations on the Audit Product

James Barbour By James E Barbour, Director, Policy Leadership

4 April 2019

The Business Energy and Industrial Strategy (BEIS) Committee has published its report on its inquiry into the Future of Audit. The report contains various recommendations split across several themes.

Whilst the media focus will undoubtedly be on the potential break-up of the Big 4 firms there is much more in the report to digest. In the first of a series of articles by the ICAS Standards’ Division, James Barbour, Director, Policy Leadership, takes a closer look at some of the report’s conclusions and recommendations. In this article, he focuses on the proposals to revise the scope and nature of audit.

Firstly, the emphasis on the auditor’s role in relation to the detection of material fraud is welcomed as is the recommendation that the Financial Reporting Council (FRC) should require auditors to make graduated findings mandatory. Requiring auditors to present at a Company’s Annual General Meeting feels a bit like a ‘Back to the Future’ moment, but nevertheless, any call for greater engagement between the auditor and the end user is to be welcomed.

The proposal that the audit report should be published at the same time as a company’s preliminary results are announced (instead of waiting for the full annual report to be published, which often happens at a later date) requires further consideration as to what exactly is intended. It has merit if the aim is to publish the annual report on the same date as the results announcement, as the auditor’s report on a company’s financial statements cannot be issued until these are signed off. As efforts to encourage greater engagement from investors are to be welcomed, the recommendation for a new requirement to be included in the new Stewardship Code: “for investors and asset owners to consider audit matters” also has merit.

In 2010, ICAS published its well-received report ‘The Future of Assurance’. This report was the culmination of the work of an ICAS Task Force (TF) which included representatives from various stakeholder groups. Some of the TF’s recommendations were substantively taken on board by the FRC as it undertook a review of revisions required to the UK corporate reporting ecosystem post financial crisis. Unfortunately, however, some of the recommendations were not taken forward. That is why it is pleasing to see that the BEIS Committee has proposed that consideration should be given to broadening the scope of audit to cover the entire annual report, recognising that there would be different levels of assurance and reporting:

As part of his review, Sir Donald Brydon should consider extending the scope of audit to cover the entire annual report, albeit with different levels of assurance and reporting.

This need for differing levels of assurance was considered by the ICAS discussion paper ‘Balanced and Reasonable’ published in 2013 with a summary of the responses published subsequently.

The needs of users of corporate information has evolved as one would expect over the years as has the extent to which use is made of a company’s annual report. Such reports, however, still have a place in the current corporate reporting framework. Increasingly, in recent years greater attention has been focussed on the front-half of the annual report i.e. the narrative content and the use of key performance indicators as directors try to better explain how they believe an entity has performed, its strategy and business model and its likely future prospects. The inclusion of non-GAAP metrics has very much become the norm. To be fair to the FRC, it has reacted to this change in user behaviour. Indeed, to some extent, it is a global leader in this field, with its requirement for directors to ensure that the annual report as a whole is fair, balanced and understandable and for auditors to report by exception where they do not believe that to be the case. Whilst this was undoubted progress, it still leaves doubts as to the extent of the assurance, if any, being provided by the auditor over the content of the annual report as a whole. That is why the BEIS Committee’s commentary is welcomed by ICAS, as further enhancements to the role of the auditor in relation to information of this nature are envisaged.

There is a need for the profession to be relevant and this is an example of where auditors can add value to the information presented by directors and on which investors may place considerable reliance. For example, as the demand from society for companies to state what they are doing in relation to the UN’s Sustainable Development Goals and reporting initiatives increases, this is another aspect on which there may be a need for the auditor to be involved. As the BEIS Committee also importantly recognises, undertaking such work will act as an incentive to those currently working in audit and indeed those considering a career as an auditor. In the words of the Committee:

A revamped product will make a career in audit more varied, exciting and rewarding. Audit should be as attractive as consulting and be seen that way but should also be much more meaningful in its service to the public interest.

This is important because there is a need to ensure that there is a pipeline of new talent coming through the assurance ranks. Combining this talent with the ongoing technological innovations that are being made by the larger audit firms will help to rebuild trust in both the audit profession and also wider business.

The need for the audit to be more forward-looking including potentially strengthening the auditor’s role in relation to the audit of, and reporting on, the going concern assumption and the viability statement may concern some members of the profession but it is undoubtedly something that has to be explored and indeed will be by the Brydon Review.

As a product, audit should be more useful and forward-looking.

It is also welcomed that the Committee recognises that if there are barriers to auditors taking on more responsibilities and reporting on them candidly (such as unlimited liability and skills issues), these should be removed. With regards to auditor liability this, of course, would require legislative change.

The ICAS motto “Quaere Verum" has stood the test of time. To “seek the truth” coupled with ‘moral courage’ as enshrined in the ICAS Code of Ethics, encapsulates all that one expects of a chartered accountant, regardless of their role. When it comes to those CAs who are auditors, the truth which is being sought will likely continue to evolve into wider areas, with many being more subjective than most, but of course not necessarily all, of the financial information currently reported.

Whilst we will need to wait for the Brydon Review to complete before we can see what the recommended future of audit product is, substantive change to audit as we know it is becoming ever more likely. This will have an impact not just in the UK, but over time is likely to influence developments around the globe.

The BEIS Committee report

View report

Topics

  • Audit and Assurance

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