Posted: 17 Dec. 2020 5 min. read

The UK audit and corporate reporting debate: One year on – building bridges to Brydon

This month marks one year since Sir Donald Brydon issued his review of the quality and effectiveness of audit. Whilst Sir Donald (or indeed any of us) may not have foreseen the challenges of the past 12 months, they only increase urgency on the need for change – for audit reform but also widespread reform of corporate governance, building a new covenant between business and its stakeholders. 

If auditors and the corporate world recognise the need to act in the interest of society, then waiting for and reacting to legislation – which may still take years to implement – is not the right course of action. The change in mindset and shift to a broader public interest purpose needs to start now.

Focusing on outcomes

The single overarching conclusion of Brydon’s report is that audit must assure and inform in ways that “establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements”.  

The thematic headlines help us understand where deserved confidence comes from: audit’s purpose; the need for scepticism; going beyond the financials; the mission to uncover fraud; granularity of reporting; engagement with shareholders and other stakeholders; greater board accountability; internal controls; and directors’ reporting. Together, they map out an ecosystem of assurance and information provision of which the auditor is only one part.

To make meaningful progress towards reform, these recommendations must be considered by all parties involved in corporate governance and corporate reporting - company directors, audit committees, policy makers, standard setters, regulators, auditors and investors alike; each of these stakeholders have an important role to play.

As we anticipate a government consultation in the New Year, which will bring Brydon’s recommendations together with the other reports on regulation and competition, we need to focus on the main outcomes for audit and the corporate model that Brydon helped articulate. This focus on more purposeful auditing and more responsible business conduct will ensure we work towards Brydon’s vision with meaningful pace; and that the consultation proposals and regulatory remedies don’t simply end up becoming ‘tick-box lists’ for boards or auditors to follow.

At Deloitte, we are committed to stepping up to ensure that future reform is about more than just regulatory compliance, but rather has openness, independence and challenge for the public interest at its heart.

Understanding the business model, risk assessments and strong governance

Meaningful communication between auditors, directors and stakeholders starts with a clear picture and understanding of the business model, which is built on a foundation of strong internal controls.

Quite simply, this means providing a complete, accurate and transparent description how a company creates value and manages risks, and the impact it has on the world around it. This is perhaps the best way to create a bridge between the current state of play in corporate reporting and a post-Brydon future.

These risks might be financial in nature, or broader risks such as those relating to customer demand, the resilience or behaviour of companies in its supply chain, its ability to mitigate cyber-attacks or understand its true environmental impact. Clear and regular reporting on how these risks are managed are key.

Some might argue there is a risk of corporates or auditors being proactive ahead of potential regulatory change. But regardless of where detailed regulatory change might take us, a clear, consistent narrative around internal controls is an important step towards building confidence, irrespective of whether it’s a regulatory requirement.

As and when we arrive at a stronger UK regulation and framework for internal controls over financial reporting, the companies that embrace and anticipate the future as envisioned by Brydon have additional advantages. Boards that seek assurance on their KPIs and non-financial metrics, and have the information that demonstrates their resilience and robustness, will meet real user needs. They will already have a strong foundation in place within a new regulatory environment and benefit from the increased levels of trust in the way the company is run.

Similarly, the audit profession needs to evolve in these areas to take us towards Brydon’s goals. At Deloitte we are already taking steps to ensure a deeper understanding of key business model risks, bringing specialists into our audits to provide new expertise and increasing training for our auditors in areas such as fraud, viability and climate. We are also challenging the entities which we audit to drive best practice in corporate reporting around their business models and to promote greater transparency around responsible behaviour.

Acting in the public interest

These actions are just a stepping stone to the bigger picture vision – and we know that there is much more that we need to do. However, these kinds of steps, independent of regulatory moves or even the consultation process on the Brydon recommendations, are important. Sir Donald Brydon himself has made that clear that “there has to be a whole mindset change on what is the purpose of an audit” [Financial Times, July 2020]

There is an imminent opportunity for all stakeholders of the corporate reporting ecosystem to engage with that question as part of the expected BEIS proposals and consultation. It is critical that company management, boards, investors and auditors all fully embrace this opportunity. It is too important for the business community as a whole, not to warrant widespread input.

Whatever the regulatory timescale of any outcomes, both corporates and auditors already have a mandate to act in the public interest. They can voluntarily move forward to respond to stakeholder requests to enhance corporate reporting and provide better, clearer information about business models and resilience.

Taking a proactive stance now in these areas is a tangible way to demonstrate responsible business behaviour, one that has moral and societal significance, beyond the financial bottom line. This is an opportunity for the auditors and the corporate world to renew their contract with society, and also for investors and stakeholders to actively engage in driving positive change. Responsibility for change sits across the corporate system. Action needs to start now.

Click here to sign up for the UK audit and corporate reporting debate

Sign up for the latest updates

Key contact

Katie Canell

Katie Canell

Director, Audit

Katie is Managing Director responsible for evolving and implementing the UK and Global audit product strategy at Deloitte. She heads up a team developing the long term vision of the purpose of audit. Over the last two years Katie has had specific focus on innovating the audit product in the context of the ongoing UK audit reform debate and Government reviews of the profession.