The publication of Brydon’s review of audit highlights the sector’s foot-dragging in reforming itself and offers some blindingly obvious changes, says Robert Bruce
This article was first published in the February/March 2020 UK edition of Accounting and Business magazine.
Unlike many of the recent reports on the accounting and auditing professions, Sir Donald Brydon’s Independent Review into the Quality and Effectiveness of Audit is refreshingly free of hidden or predisposed agendas.
Quite the opposite. There is a strong sense of deep frustration at the long history of people claiming to deal with obvious problems and nothing much being done. It seems to have spurred Brydon on to produce 64 blindingly obvious, common-sense proposals.
Surely we can’t still be arguing, as our grandparents’ generation was, about the idea of an expectations gap? It is ‘a distraction – either audit is helping to reinforce deserved confidence in business or it is not’, he says. ‘What is required is better audit delivered by professionals in a more understandable framework.’ For example, why are all the ancient hobby horses, such as the case for prudence, being resurrected and given the runaround yet again? Why is all the debate so familiar and circular?
Brydon sweeps all the old tosh away. For example, why not ‘require the audit fees to be shown on the face of the profit and loss account as being struck, like the dividend, after the reporting of post-incentive compensation profit’? And why should the power to negotiate the fees not be delegated to the audit committee chair? And should the fee not be set by an independent team rather than being negotiated by the partner leading the audit who is, by his involvement, conflicted?
And while we’re are at it, why not have a standing item in AGM agendas where the audit committee chair and the statutory auditor are questioned by the shareholders? And how about ensuring that auditors report in a detailed fashion on whether the directors of the company have produced an annual report that is, as the law says it should be, ‘fair, balanced and understandable’. Brydon found no evidence that any auditors had ever done this.
The comfort blanket
The problem Brydon is really worrying away at is a familiar one. Years ago the UK took its cue from a business culture dominated by accountants. That used to emphasise thought, rather than a mass of rules. But the tougher life became, the more auditors found it comforting to take refuge in rules. In the US, where business culture is lawyer-dominated, this has always been the case, hence the gargantuan bureaucracy of the Sarbanes-Oxley regulations.
So it is refreshing to find Brydon reminding auditors of the need to use their knowledge and experience of a client. He looks at the duties of directors to comply with section 172 of the Companies Act to operate their company in the interests of stakeholders. And he invents the useful concept of ‘observed reality’ to ensure that auditors think. ‘The audit report should include a new section in which the auditor states whether the company’s section 172 statement is based on observed reality, on the basis of the auditor’s knowledge of the company and its processes.’ This is another example of Brydon hacking away at the arcane discussions that have encrusted the audit world with processes and regulation.
Not that he doesn’t value the audit itself; he just wants more to be made of it. Currently he thinks it too producer-led. And other business participants don’t help. He found himself ‘underwhelmed’ by discussions with portfolio managers of whom ‘few appeared to read the audit report thoroughly’. ‘It does call into question whether the reporting of auditor judgement and scepticism is being carefully considered,’ he says.
The whole of Brydon’s report teems with sensible proposals that cut through all the old arguments. He even suggests there should be two separate professions: accounting and auditing. His view is logical: ‘Auditing is not the same as accounting, and in the years ahead, it will encompass even more.’
Like so many ideas in the report, the profession itself could have done all this, implemented all this, years ago. But instead it has sat there like a Christmas pudding, immobile and rich, occasionally setting fire to its holly to distract its critics. And now its comeuppance is nigh. Or, as Sir Andrew Likierman, professor of management practice at London Business School, puts it in his comments to the review: ‘Why would any stakeholder, and particularly auditors themselves, not wish to improve the quality of professional judgement?’
Robert Bruce is an accountancy commentator and journalist.
"The audit profession could have done this years ago but instead it has just sat there like a Christmas pudding"