European Audit Committee Leadership Network, December 2020
Recent controversies in the United Kingdom have brought accounting and auditing into the limelight, prompting calls for greater scrutiny and for deep changes in the way auditing takes place. Reviews of the profession have assessed its market structure and its regulation by the Financial Reporting Council (FRC). In 2019, the UK Secretary of State for Business, Energy and Industrial Strategy commissioned Sir Donald Brydon, the outgoing chair of the London Stock Exchange and an experienced corporate director, to lead a fundamental review of auditing. Sir Donald’s December 2019 report argued for a comprehensive reform of auditing and changes in corporate governance and reporting. He offered 64 recommendations on how audits should be conducted and overseen by audit firms, by boards and audit committees, and by regulators. Nearly a year after its release, the report is still being debated as implementation has been slowed by both the global pandemic and Brexit.
On 17 November 2020, Sir Donald joined members of the European Audit Committee Leadership Network (EACLN) to discuss his report, focusing on recommendations of greatest relevance for audit committees and boards.
The dialogue between Sir Donald and the EACLN members touched on three themes:
Background of the review
Sir Donald began the discussion by explaining his overall approach to the review and the objectives of the audit model that he developed. He articulated a vision of an audit that provides information that helps answer three questions: (1) Is the company being honestly run? (2) Does it have a reasonable chance of survival? (3) Is the information the company is providing useful for decision making? His work sought to understand the environment of audit and how all the pieces could come together to achieve this vision. He received 120 responses to his call for input, and he convened over 100 meetings and roundtables with interested parties.
The corporate audit
Sir Donald underscored the importance of extending assurance to cover alternative performance measures (APMs) and other information not in the financial statements. These are increasingly important to shareholders and other stakeholders, and “they should be held to the same standard of quality”1 as the measures and information in financial statements. EACLN members strongly agreed that APMs and other information outside the financial statements should be audited, and they also agreed that the lack of uniform standards for auditing this information should not prevent auditors from moving forward. Several members noted that they had already implemented some level of assurance on APMs at their companies. However, Sir Donald and the members acknowledged that a wider scope for the audit would require both auditors and audit committees to expand their capabilities, which for auditors could mean the establishment of a broader audit profession.
Engaging with stakeholders
Sir Donald discussed his view that audit could be improved through enhanced engagement with shareholders. Publishing an audit and assurance policy, for example, would help shareholders provide input on the scope of the audit, as they do on remuneration schemes. Publishing the risk report before the scope of the audit is determined could also stimulate feedback. Several EACLN members were skeptical of such measures. They had concerns about additional information sharing, and they reported that investors have shown little interest in audit issues. Sir Donald acknowledged their doubts but suggested that providing additional information and influence over the audit might lead gradually to improved engagement, as an increasingly relevant audit report would stimulate more interest. Over time, he noted, growing investor input could fill a vacuum that might otherwise be a tempting target for government intervention once current distractions subside.