- Sir Donald Brydon’s review into the quality and effectiveness of audit in the UK outlined 68 recommendations for improving the audit process.
- Brydon argues that audit has lost its way, should focus more on informing the end user, and be separate to accounting.
- He wants audit to be extended beyond examining financial statements to reflect wider aspects of a company’s viability.
By John Burfitt
In many respects, Sir Donald Brydon was the ideal person to head up the landmark report into the effectiveness and quality of audit in the UK. That report, handed down on 18 December 2019, is now widely known as the Brydon review.
Brydon’s half-century career in asset management at British Airways and Barclays – and former stints as chairman of the London Stock Exchange and the UK’s Royal Mail Group – convinced both the accounting profession and UK government he was perfectly positioned to helm the investigation.
He’d been a member of the Auditing Practices Board when it commissioned John McFarlane’s 1992 discussion paper, The Future of Auditing. That report clearly identified perceived gaps in the scope of audit, particularly regarding directors’ stewardship, future prospects and risks, fraud, internal controls and interim reporting.
But the man himself was less sure.
When initially approached, Scottish-born Brydon, 75, current chair of the Sage Group, doubted he knew enough about contemporary auditing to undertake such an investigation.
“I have been an investment professional for a long time and led major asset management companies, so I knew about audit as a user, but had not sat down to study all the arcane detail of it for years,” Brydon tells Acuity in an early morning phone call from his home in central London.
That doubt soon proved to be his greatest advantage.
“I found very quickly it was an advantage to have the basic grounding, but not to be lost in all the details. It allowed me to look at the profession from the outside in. I got to work without having a preconception as to how an audit should be structured,” he says.
His investigation involved more than 150 meetings with regulators, auditors, investors, companies and professional services firms across the UK, and reading 120 submissions totalling more than 2500 pages.
A simple lesson: language matters
Brydon’s inquiry into auditing in the UK came in the wake of two others: The Independent Review of the Financial Reporting Council in December 2018 and the Competition and Markets Authority’s Statutory Audit Services Markets Study released in April 2019.
All three reports followed a number of high-profile corporate collapses in the UK – construction and services giant Carillion, BHS department stores and Thomas Cook travel group –that led to greater scrutiny of the audit profession.
As he faced the task ahead, Brydon found the mixed messages by some responders “staggering”; it was what convinced him such a review was necessary.
“I was advised by one highly experienced individual that one should always know at the outset of any review what its final conclusions are going to be, and I did not,” he says. “What I did know was there was considerable dissatisfaction with audit, and audits needed to be more informative.
“One major investment firm also stated they never read the audit reports anyway – they get a machine to do it. Another major investor said they don’t read audits as they don’t believe them. All that was depressing.”
After 10 months of work, Brydon released his 138-page report (officially the Independent Review into the Quality and Effectiveness of Audit) which outlined 68 recommendations for improving the audit process. Among them were the need to encourage greater engagement of shareholders, greater clarity around the role of the audit committee, improved measures around fraud detection and prevention, improved auditor communication, and a change to the language of the opinion given by auditors.
Brydon didn’t pull any punches, beginning his treatise with “Language Matters”. Another section stated bluntly, “audit has lost its way”.
On those points, Brydon explains, “If audit is to be a mechanism for improving trust, then it also has to be accessible. But we have what I call ‘the language of auditors’ where we have intense debate about the differences in words like ‘material’ and ‘significant’ and ‘important’,” he says.
“That has become so arcane, it has left the users behind. All that is needed is plain language clearly understood by everyone.”
Picture: Sir Donald Brydon.
Audit scrutiny in Australia
The current Australian Senate inquiry into the regulation of auditing during recent months has extended its investigations and is now due to hand down its findings on 1 September 2020. Brydon has been following the inquiry, especially after learning that some parts of his report were being presented as evidence.
“There was a moment when I was evidenced because I had stated I was worried shotguns were pointed at auditors every time there was a corporate failure,” he says.
“I had stated I was worried shotguns were pointed at auditors every time there was a corporate failure.”
In a speech back in October 2019, he’d pointed to people’s frustrations with “narrow, backward-looking and increasingly rules-obsessed approach to audit”, when they wanted more forward-looking aspects of a company covered as well.
It was something he may have expanded on in March, when he was set to visit Australia and speak at a CA ANZ Sharing Knowledge Series event in Sydney, cancelled due to COVID-19.
Brydon will not be drawn into offering specific points the Senate inquiry in Canberra could take from his review – “I really don’t know enough about the Australian landscape,” he says – but he does offer these sage words: “My report gives a philosophical and structured framework within auditing, which is a good standard to test whatever is happening in the industry in Australia.”
The case for making audit independent
What is often described as one of the most significant of Brydon’s recommendations is the suggestion that auditing should be an independent profession in its own right, separate from accountancy.
His report outlines a set of principles that would apply to all corporate auditors. This key reform may change many of the current rules, but Brydon stresses it must be seriously considered.
“Auditing is different to accounting,” he says. “If you have a standalone profession then you have the opportunity to define the principles by which you behave, the standards to which you conduct affairs and, importantly, you could have other people other than accountants operate within the same framework.
“For example, auditing cyber risk or ESG [environmental, social and governance] need not necessarily be done by chartered accountants.”
An important aspect of defining this new set of auditing principles, Brydon explains, is additional focus on the need to inform the end user.
“I don’t believe audit today thinks about the performing activity, only the complying activity,” he says. “If you start with a different mindset about the need to inform users, I think you get to a different place.”
Many of Brydon’s recommendations rely on the implementation of The Independent Review of the Financial Reporting Council report from 2018, particularly in relation to setting up a new audit regulator, the Audit, Reporting and Governance Authority (ARGA).
Brydon believes the COVID-19 pandemic will delay the UK government officially implementing his report. He suggests, however, that the accounting profession itself could take the lead on some of his points, for example, companies publishing their risk reports at the mid-point of the financial year.
“That would encourage investors to take more interest in the audit process,” he says. “There’s also a number of working bodies in London looking into the education curriculum for the possibility of establishing a new [audit] profession. But you can’t flick a switch and make this happen. It needs people to have some time to think about.”
Brydon sees the pandemic as an opportunity
As for the pandemic, he calls it “the worst threat to the economy I have ever lived through”. And yet, Brydon states now is the time for leaders – those already in position and emerging – to step up and lead the way.
“Business goes on, so we must not talk ourselves into a total depression,” he says.
“We must take this seriously but also see this as an opportunity to improve ourselves and the way we work. Set some goals, do some online study, and aim to come out of this knowing more and being able to do more than you did before.”
The same goes for those just starting out in their careers. Considering his own has been multifarious, Brydon is often asked how younger accountants can find their path through the profession. The secret, he says, comes down to one quality: curiosity.
“The greatest attribute they can have is to be naturally curious,” he says. “Successful auditors are not the ones who tick all the boxes. They’re the ones who ask the difficult questions.
“Successful auditors are not the ones who tick all the boxes. They’re the ones who ask the difficult questions.”
“To build a strong auditing profession, what is needed is education. Young auditors should be thinking about learning about psychology, to communicate in a simple language and how to be suspicious without being intrusive. All that comes down to education, and it’s needed now more than ever.”
“Young auditors should be thinking about learning about psychology… and how to be suspicious without being intrusive.”
With the disruption to all industries over the past few months, one could argue that the time to implement a big shift in auditing is now. But of all the signs of dramatic change Brydon’s been watching closely, it’s one that happened just outside his home that he’s certain is the most telling.
“We live in central London and it’s usually very busy, but last night I heard a bird singing at my window,” he says. “I haven’t heard a bird singing outside in years, so that tells me something big is changing in the environment we live in.”
Brydon Review key recommendations
- A redefinition of audit and its purpose, providing greater clarity about who audit is for and reinforcing its role as a public interest function.
- The creation of a standalone audit profession rather than as an adjunct to the accounting profession, to be governed by overarching principles.
- An obligation on auditors to inform, and the need to be suspicious as well as sceptical.
- The opportunity to extend auditing beyond just examining financial statements, to reflect the wider interests of everyone who depends on the company’s ongoing viability.
- Clarification that auditors should endeavour to find corporate fraud and a requirement that they undertake education in forensic accounting and fraud detection.
- A step up in auditor transparency, with requirements to publish their profitability from audit work and the remuneration of statutory auditors.
- A clarification of the opinion given by auditors and greater granularity of information about estimates.
- Mechanisms to encourage greater interaction for shareholders with the audit process, including the ability to pose questions to auditors at AGMs.
- New reporting requirements for directors about resilience, public interest and audit policy.
- A responsibility for directors to explain the actions they have taken to prevent material fraud and to report on internal controls.
The quality and effectiveness of audit: independent review
Download the full report and Sir Donald Brydon’s recommendations here.Download