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‘Urgent reform’ needed for scandal-hit audit sector, report finds

Sir Donald Brydon has recommended making auditing independent under a sweeping shake-up to help prevent corporate failures.

Britain’s under-fire audit sector should be made independent from the wider accounting profession as part of sweeping reforms proposed to crack down on bad practice, a report has recommended (Chris Radburn/PA)
Britain’s under-fire audit sector should be made independent from the wider accounting profession as part of sweeping reforms proposed to crack down on bad practice, a report has recommended (Chris Radburn/PA)

By Holly Williams, PA Deputy City Editor

Britain’s under-fire audit sector should be made independent from the wider accounting profession as part of sweeping reforms proposed to crack down on bad practice, a report has recommended.

A government-backed review, led by City grandee Sir Donald Brydon, warned there needs to be “urgent reform” to rebuild confidence in the sector after a raft of recent corporate collapses, including outsourcing giant Carillion, department store BHS and travel agent Thomas Cook.

Sir Donald – a former London Stock Exchange chairman – recommends the creation of a standalone audit profession, which should be governed by its own principles, qualifications and standards.

He also said auditing should reflect wider public interest, rather than simply verifying financial statements.

Other recommendations in the 138-page report, which comes a year after the review was launched, include improved auditor transparency, a specific focus on rooting out corporate fraud, and additional powers for shareholders to question auditors at annual investor meetings.

Sir Donald also said auditors should be responsible for ensuring that firms with weak balance sheets have sufficient reserves to pay out dividends.

Audit is in need of urgent reform if we are to increase confidence in business and increase the chances of preventing unnecessary corporate failures Sir Donald Brydon

The call for change comes amid a period of intense scrutiny following the high-profile failures and accounting scandals, with large publicly listed companies collapsing shortly after making hefty payouts.

Auditors have been heavily criticised for not spotting issues earlier, which could have helped prevent thousands of job losses and pension bailouts by the State.

It also comes after last year’s review of the Financial Reporting Council (FRC) by Legal & General chairman Sir John Kingman, which called for the audit watchdog to be scrapped and replaced by a new regulatory body.

Sir Donald said: “The current audit framework is made up of a mosaic of legislation, statutory and self-regulation, and formal and informal guidelines developed over a century.

“It is no longer capable of fully supporting the expectations of the users of audit.

“Audit is in need of urgent reform if we are to increase confidence in business and increase the chances of preventing unnecessary corporate failures.”

He added: “Audit is not broken but it has lost its way and all the actors in the audit process bear some measure of responsibility.”

The Competition and Markets Authority (CMA) has also carried out a probe into the sector, outlining proposals to loosen the stranglehold held by the big four – KPMG, Deloitte, PwC and EY.

This would include an operational separation between their audit and non-audit arms.

The FRC said it has already begun to put into action some of Sir Donald’s recommendations.

But questions have been raised over the FRC’s future following last year’s Kingman Report and Sir Donald’s review.

On the Brydon Review, an FRC spokesman said: “Many of his recommendations, if accepted by the Government, will have significant implications for the FRC in respect of our activities and resource requirements.”

Business Secretary Andrea Leadsom said it is “essential that we rebuild trust and confidence in this vital business oversight”, and confirmed that the review will help inform the Government’s overhaul of audit in early 2020.

The Institute of Directors said the report is “on the money” and welcomed the proposals to widen the scope of audit beyond financial statements, while CMA chairman Andrew Tyrie said the plans are a “big step forward”.

Mr Tyrie added that legislation to implement proposals from all three audit reports is “now essential”.

PA

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