2020 Annual Report

5 min read

The audit debate: time for change

We’d expected that 2020 would be a transformative year for audit reform. While COVID-19 may have slowed the pace of legislative and regulatory reform, it hasn’t taken away from the pressing need for change.

All of the major independent reviews into the sector – including those by Sir John Kingman, the Competition and Markets Authority (CMA) and Sir Donald Brydon – are complete.

Some of the recommendations put forward are being taken forward by the regulator and the firms voluntarily, others requiring legislation await further consultation.

Reform of audit was in both the Conservative Party manifesto and latest Queen’s Speech, and Parliament’s BEIS Select Committee opened a new inquiry to tracking progress on audit reform (we submitted written evidence at the start of September), so there is appetite from politicians to move ahead too.

While the disruption caused by the pandemic has unsurprisingly challenged the pace on some reform, this should not hinder progress as we head into the remainder of 2020, and beyond.

Momentum for change

We’ve been consistent right from the start of the debate in our support for reform – we remain committed to playing our role in delivering change that enhances audit quality, improves choice and restores trust.

While there are some reforms that will require legislation, we also recognise that we must go further – to be more transparent about our audit business and continue to demonstrate that audit quality remains our number one priority.

That’s why we recently announced changes to our audit governance structure, with the establishment of an independent Audit Governance Board (AGB). Effective from 1 January 2021, the AGB will be chaired by Margaret, Baroness Ford of Cunninghame OBE, and will have a majority of independent non-executive directors, including Jim Coyle, Almira Delibegovic-Broome QC and Shirley Garrood.

The AGB will have responsibility for providing independent oversight of our UK audit practice, with a focus on the policies and procedures for improving audit quality and ensuring the Financial Reporting Council’s (FRC) objectives of, and desired outcomes for, operational separation are met.

It’s also pretty clear from the audit debate that the current product is not meeting the needs of all its stakeholders and the complexity of today’s business environment. As described by Sir Donald Brydon, we agree audit should inform as well as assure, extending its scope to areas of broader public interest, not solely historic financial statements.

We are therefore bringing about changes to our audit product. Examples include enhancing our risk assessments to equip our auditors to focus on fraud and viability, working closely with a range of specialists to provide further challenge. We also aim to provide more assurance and transparency around responsible business behaviour, including by providing greater clarity around the financial and non-financial risks within modern corporate business models.

However, as we have said throughout this debate, these changes must also be considered alongside a wider package of reform. This includes in vital areas such as corporate reporting, the role of directors and the regulatory environment in which we operate. To us, it would be a missed opportunity to just make changes in audit and to stop there. Wider reform is needed to enhance quality and improve trust.

The COVID-19 pandemic has brought companies, regulators and auditors together to navigate corporate reporting in an increasingly challenging environment. One where future viability is often unclear, where there is a heightened risk of fraud and where businesses have to demonstrate their impact on society like never before.

We must use this momentum to drive longer-term change – creating an audit product of the future that is valued by all stakeholders and a more robust corporate governance ecosystem.

Voice in the debate

Throughout this process, we’ve been engaging closely with government departments, regulators, politicians and the media to inform the broader debate about the audit market and share our points of view on potential measures for reform.

Examples include publicly sharing our ideas, providing interviews and commentary in response to key recommendations, as well as writing opinion pieces and blogs, and contributing to podcasts and other mediums.

We acknowledge that change is needed urgently and this requires everyone in the market to step up. In particular, the voice of companies and investors needs to come through in this debate – sustainable and effective changes will require their input.

The guiding principle for our firm has always been that any changes introduced must enhance audit quality. Where we see that certain solutions could endanger this, we have put forward practicable alternatives.

We have also been resolute in our position about the unintended consequences of certain changes, and stressed that reforms must be proportionate, and avoid damaging the reputation of the UK as a leading capital market and its position in the global economy – particularly as we emerge from the pandemic and the UK repositions itself after leaving the EU.

Ultimately though, businesses, regulators and governments around the world are watching the UK debate closely, so there is an opportunity to bring in reforms that set a lead for others around the globe to follow.

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