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The audit debate

The audit profession has faced continued scrutiny over the course of 2019. External stakeholders – ranging from politicians and the media to regulators, industry bodies and investors – have each questioned the role of auditors in light of sustained and negative headlines concerning business failures, fraud and the ongoing perception that auditors’ independence is clouded by conflicts of interest.

This has been compounded by firms receiving sanctions for audit work by the Financial Reporting Council (FRC), which included Deloitte being fined £4.2m over the firm’s 2011 and 2012 audits of Serco Geografix. We deeply regret our work at the time did not meet the professional standards expected of us, and we’ve taken measures to continuously improve our audit quality processes, all of which have evolved significantly since these audits were performed. While 75 per cent (79 per cent in 2017/18) of our FTSE 350 audits required no more than limited improvements, 84 per cent (76 per cent in 2017/18) of our overall audit engagements reviewed by the FRC this year were rated good or requiring limited improvement.

However, it is not surprising that a number of inquiries were launched last year, including the Business, Energy and Industrial Strategy (BEIS) Select Committee Future of Audit study; the Kingman review of the Financial Reporting Council; Sir Donald Brydon’s examination of the scope of an audit; and, the Competition and Markets Authority (CMA) formal market study into the statutory audit sector.

We are committed to supporting reform and meaningful change as part of these reviews and the wider audit debate. We are responding to all inquiries through written and oral evidence, whilst listening to and engaging with our stakeholders across the business, regulatory, political and industry communities. We have held a number of roundtables, and hosted discussions with many of the companies we audit, our wider clients, audit committee chairs, investors and other interested parties. We have had over 30 meetings with key officials and regulators. In addition, we held our Stakeholder Forum in October 2018, which saw opening remarks from Rachel Reeves MP, Chair of the BEIS Select Committee. This was followed by a panel discussion we hosted in June 2019 that brought together investors, policymakers, audit committee chairs and the FRC, among others.

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 sensible, practicable and effective alternatives, such as a model of shared audits, stronger governance around the audit business and ending non-audit services to the companies we audit to tackle perceived conflicts of interest. We have also been resolute in our position about the unintended consequences of certain changes, such as joint audits and operational separation, 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.

We’ve also been clear that we need to address the gap between what an audit currently does and what stakeholders and the wider public expect it to do. Sir Donald Brydon’s ongoing review is looking into this very question. Rather than simply waiting for others to suggest what future audit products should look like, we’re looking carefully at how we carry out our own audits; how we can improve and expand them; how we could broaden the scope of audit beyond existing auditing standards; and, evolve our audit product to provide a clearer narrative for a range of users of the accounts.

With the UK Government now setting out the next steps to the ongoing audit reviews, this is a matter that will remain of significance in the months ahead. We are committed to playing a key part in this debate and engaging the widest possible group of stakeholders to ensure there is a holistic response to this debate.

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