Report of the Independent Review into the Quality and Effectiveness of Audit

Dec 20, 2019

Exactly one year to the day after his review was announced, and available a couple of weeks earlier than anticipated, Sir Donald Brydon has published his report into the quality and effectiveness of audit.

The report, which the UK Government commissioned, looks at the provision of audit services to UK Public Interest Entities, acknowledging that it could impact on the services provided by auditors beyond the UK.

In June 2019, Chartered Accountants Ireland responded to the consultation with a lengthy submission. We had previously engaged with the other two key consultations/studies relating to the UK audit sector, namely the CMA’s Statutory Audit Services Market Study and the Independent Review of the Financial Reporting Council by Sir John Kingman.   

The recommendations in the newly published report warrant careful consideration as they propose some radical shifts for both the auditing profession and the directors of businesses in the UK. 

The recommendations include:

  • A redefinition of audit and its purpose;
  • The creation of a corporate auditing profession governed by principles;
  • The introduction of suspicion into the qualities of auditing;
  • The extension of the concept of auditing to areas beyond financial statements;
  • Mechanisms to encourage greater engagement of shareholders with audit and auditors;
  • A change to the language of the opinion given by auditors;
  • The introduction of a corporate Audit and Assurance Policy, a Resilience Statement and a Public Interest Statement;
  • Suggestions to inform the work of BEIS on internal controls and improve clarity on capital maintenance;
  • Greater clarity around the role of the audit committee;
  • A package of measures around fraud detection and prevention;
  • Improved auditor communication and transparency;
  • Obligations to acknowledge external signals of concern;
  • Extension of audit to new areas including Alternative Performance Measures; and
  • The increased use of technology.

The report states very clearly that the directors have a role to play in corporate reporting.  We welcome the recommendation that the board should have enhanced responsibilities regarding the viability of the company and should produce a Resilience Statement that builds on the current going concern and viability statements.

The report recommends the consideration of an internal controls review along the lines of the US SOX reports.

In our letter we advised caution regarding this and that further work/evidence is required to justify the introduction of such a costly regime.

In our response to the consultation we commented that the developments in auditor reporting in recent years have been very beneficial.  The introduction of commentary on ‘key audit matters’ (KAM) and discussion of materiality issues provides rich information for users of financial statements and that   this could be further developed by auditors commenting on KAMs year on year.  We are pleased to note that the report recommends such follow up.

Audit fees will be more upfront in the financial statements and audit firms will be required to publish the profitability of their work from audit. They will also be asked to disclose, “within the audit report, the hours spend on each audit by each grade within the audit team”. This can only lead to much lengthier reports.

In addition, it is proposed that auditors are given the freedom to include a wider range of material in their report as they feel appropriate. This will be a significant change for the current reporting and would rely heavily on the professional judgement of the auditor.

Sir Donald Brydon stated “I recommend that auditors should be free to include original information, materially useful to a wide range of users, in their audit report and at the AGM, and not be confined to commenting on that which has already been stated by directors.”

We look forward to the discussions and debates that this report will no doubt generate and we will be publishing commentary and further analysis in 2020.