The Brydon report asks what audit is, who it is for and whether or not it meets requirements. Jane Fuller looks at the impact on auditors
This article was first published in the July/August 2019 UK edition of Accounting and Business magazine.
At last the UK is getting down to fundamental questions about audit. Sir Donald Brydon has boiled down his independent review into the quality and effectiveness of audit into three questions: what is audit, who is it for and does it meet requirements? ACCA’s recent report, Closing the expectation gap in audit, sorts the answers into three components, (lack of) public knowledge, auditors’ performance and the need for audit to evolve.
Closing the performance gap is crucial. Auditors should do what they say they have done in their report to shareholders: check the truth and fairness of the accounts and the company’s compliance with the Companies Act, confirming their independence of the company.
If they applied the proper materiality test, based on matters that might alter the economic decisions of accounts users, that would help too. It also serves as a reminder that it is not just shareholders who have skin in the game. So do all creditors, including suppliers.
This brings us to the scope of audit and its evolution. Scope is widening in at least two ways. First, the nature of modern businesses and balance sheets means that auditors increasingly have to look at management’s cashflow forecasts because that is what drives the value of intangible assets such as goodwill. There is no escape from assessing management’s view of the future.
Second, the revised International Standard on Auditing (UK) 570, on the going concern basis of accounting, increases demands on auditors significantly. For example, assessing the risk of a business model means watching out for tipping points such as the one that has affected government contractors. This work used to be very profitable, but intense competition, coupled with cost-cutting by clients, made it a curse to be a winner.
A third way in which scope is likely to broaden is in inspection of information beyond the financial statements. A bank’s risk-weighted assets and the use of adjusted profit numbers are just two examples. This extension should focus on financial information. Auditors are not best placed to check social and environmental impact.
It would also be a step too far to regard the primary audience as the public. They might expect auditors to prevent company failures, but they need to be told that this is not possible. It would mean public appointment of auditors via the government and its agents.
Which brings us to the knowledge gap. Auditors must not hide behind this, but nor should they be scapegoats. The main responsibility for the numbers lies with company boards, and those who invest or lend money should ensure that they do this advisedly, using the wealth of financial and other information available.
Jane Fuller is a fellow of CFA Society of the UK and co-director of the Centre for the Study of Financial Innovation.
"The main responsibility for the numbers lies with company boards, and those who invest or lend money should do so advisedly"