Sir Donald Brydon issued his report Assess, Assure and Inform Improving Audit Quality and Effectiveness unexpectedly early, on the 18th December 2019. As you would expect, the report is extensive covering many of the areas that impact on quality, with lots of good suggestions for change. The biggest change proposed, however, is for the new Audit Reporting and Governance Authority (ARGA) to create an entirely new and separate profession of corporate auditors.
Brydon points out, correctly, that there are many areas of corporate reporting over which some form of audit opinion would be useful. Indeed he puts forward a user-driven assurance model which you may have read about in the ICAEW's recent thought leadership paper on the issue. In this wider world of corporate audit there would clearly be a need for experts other than accountants to be involved and to that extent perhaps an overarching corporate auditing profession might be useful. However, to suggest (as I believe the report does) that accountants currently don't have the skills necessary to carry out an audit of financial statements is, in my opinion, to confuse the fact that failures have occurred with the root cause of that being that accountants (qualified as auditors) did the work.
An accountant's training involves understanding ethics, financial reporting frameworks, business models, tax and technology among other things, as well as audit. This seems to me a very appropriate basis for a financial statement auditor. That's not to say that there are no improvements to auditors' education that could be made. I have trained auditors, initially students and then qualified auditors, for 30 years and there are still areas that are weak today that were weak 30 years ago. This clearly suggests that more is going on that meets the eye and one of those factors is identified by Brydon - an understanding of psychology and a need to teach auditors how to be suspicious and forensic in their approach when needed. A focus on issues such as confirmation bias, groupthink and anchoring bias might help auditors of all levels to better understand how their brains are being driven to avoid being sceptical and challenging.
If Brydon's recommendations for a new audit profession are taken up, this means the process of specifying the necessary education will go to the newly formed ARGA. However, the existing FRC already approves the education and registration requirements for auditors and so it is difficult to see how moving the entire training and certification process to ARGA will create the desired improvements. What will the new ARGA know, that could not be acted upon by existing providers of audit qualifications? And will their inexperience and "newness" to the process be a hindrance rather than a help?
And then we come to Brydon's laudable aim of creating a desirable auditing profession. He points out that firms should not overwork their more junior staff (including managers). Whilst not in the report I have heard of audit teams taking sleeping bags to clients as there won't be time to go home and working 70 hours or more a week in busy season. I agree that these sorts of working conditions are damaging for individuals and must be damaging for quality and should stop. Now. They also do much to put junior auditors off the idea of pursuing a career in audit. A rebalancing is needed and whether this leads to increased audit fees, or partners taking less of the fees as profits, is something that both the market and the firms themselves will have to consider.
And what of new entrants to the profession? In the past, the profession has meant, as Brydon clearly articulates, the "accountancy profession" of which auditors are a subset. Many bright young graduates and school leavers sign up to training contracts with firms where many, for the first three years, know they will largely undertake audit. They may, or may not, have any desire to be auditors, but they understand that post-qualification there are many routes to take. Brydon correctly identifies that audit, as a profession, does not necessarily have that much allure, despite its importance to a strong economy. Does hiving audit off as a separate profession create the glamour or interest necessary for the next generation of auditors? Or is keeping accounting and auditing as a single profession a better way to develop auditing, where some of the trainees find that audit is what they want to do even after they finish their training? Either way, less auditor "bashing" and more recognition of the positive work done by auditors is surely needed and Brydon supports this with clear recommendations that ARGA praises good audits as well as acting on poor ones.
Now, let's be clear, I am not unbiased in my approach to this, despite efforts to be as analytical as possible. I am very proud of my ICAEW qualification and heavily involved in the Institute itself. I wonder where I would fit in this new world of a separate corporate auditing profession. I write technical material, advise and teach on the topics of audit, financial reporting and money laundering. But I am not a responsible individual (ie able to sign off audit reports) and I don't actually do audits. So, would I find myself outside of the profession that I primarily advise? Or perhaps I could be part of both professions an auditor and an accountant? Brydon certainly imagines that, at least to begin with, accountants will still be part of their original professional body, whilst also being shifted to the new corporate auditing profession.
There are myriad issues that will need to be resolved if a new and separate corporate auditing profession is to be created. But even without this "new profession" there are steps that can be taken which should help to improve the quality of audit.
Brydon sets out new principles for corporate auditors, these start off based around the current ethical principles of integrity, objectivity and professional competence. But they go much further than this, highlighting the need to be acting in the public interest (which is more implicit in the ethical code), to challenge management, to be open and transparent and to ensure any material information is disclosed in the annual reports among others (see p34 of the report). Whilst many of these points are dealt with in auditing or ethical standards it does seem useful to refine them into a short set of principles that auditors can focus on. The cry is often that the auditor cannot see the wood for trees - too focused on completing endless checklists to remember the really important points. Now audit failures are, in my mind, far more complex than that, but there is a risk where so many rules exist that the objective is lost and having overarching principles to follow may we'll be helpful.
Importantly there is also a proposal for revised reporting by companies on resilience (or viability). Brydon recommends a three-pronged statement which looks at short, medium and longer-term viability of the entity. This should help focus directors and auditors more closely on the different horizons and perhaps will lead to more useful reporting.
Many other areas are covered in the report and worth reading about, including:
- Discussion of the previously mooted idea of a Sox-lite and some encouragement for this, albeit in a proportionate way.
- Improvements to the way that audit committees engage with the auditors and boards and steps to try to get shareholders more involved.
- Refinements to require more audit work on Key Performance Indicators (KPIs) and Alternative Performance Measures (APMs).
- Encouragement for graduated findings when auditing estimates and judgements such as goodwill, intangibles and fair values (though still with a binary audit opinion).
- Much greater emphasis on an understanding and audit of fraud.
- A change from a "true and fair" to a "fairly presented" opinion, on the basis that there are too many estimates to really say something is "true".
There is much in the Brydon report of merit and he is right in saying that government and regulators, as well as the profession, need to act swiftly to make changes. I am, however, far from convinced that an entirely separate profession of corporate auditors, run by ARGA, will be the solution envisaged to creating a vibrant, new profession with higher quality audit.
But action is required. These issues are not new, but we have perhaps allowed "a quest for the perfect to be the enemy of the good" by thinking we haven't solved the problem properly so shouldn't do anything. Many an Olympic winner has done so on the basis of marginal gains. If we constantly adjusted with marginal gains, we may not have experienced the problems we now have. We may need to make some bigger changes to "catch up" but do we need to start from scratch?
This article was first published on LinkedIn on 19 December 2019.