Publication of the Brydon Report

Audit purpose and a new audit profession

Brydon does not conclude that audit is broken but that its purpose is not clearly understood. So he recommends that a guide to audit is written in plain English, explaining what work is performed in an audit and what the components of an audit report mean.

Brydon also recommends creation of a separate and distinct ‘corporate auditor’ profession, with qualifications being required for different types of audit, and Principles of Corporate Auditing governing their work.

Changes to the audit report

Brydon considers that the term ‘true and fair’ is poorly understood and should be replaced with ‘present fairly, in all material respects’ within company law. He favours retaining a binary opinion rather than a graduated opinion, but suggests expanding what auditors are asked to include in their audit report, to cover ‘original information, materially useful to a wide range of users’, even if this has not been mentioned in the accounts, and to comment on material that is published outside the accounts - for instance, investor presentations and RNS announcements.

Brydon also wishes to enhance continuity between successive audit reports, including calling out inconsistencies in public information.

The audit report should also make explicit comment on whether directors have complied with their s172 responsibilities. It should also give information on details of the audit work including the number of hours spent on the audit by each grade of staff.

Where the recommendations ask the directors to prepare new reports, eg the Public Interest Statement and Resilience Statement, auditors would be required to report on these.

Fraud and the audit

Auditors would, under Brydon’s recommendations, be required to demonstrate ‘suspicion’ which appears to be stronger than professional skepticism and involves a more forensic approach to the work (including more training in fraud awareness). ISA (UK) 240 should be enhanced so that an auditor is obliged ‘to endeavour to detect material fraud in all reasonable ways’.

Work required of directors, shareholders and others

Brydon encourages directors to present shareholders with a three-year rolling ‘audit and assurance policy’ setting out their approach to auditor appointment, fees etc. He suggests that Strategic Reports should include a Public Interest Statement and that the directors should prepare a ‘Resilience Statement’. Directors should also provide an annual statement around the effectiveness of internal controls over financial reporting, and that this would be subject to audit following any disclosed failures.

Companies would be required to put in place a mechanism allowing stakeholders including employees to raise issues with the auditor, to allow shareholders more say in what the audit covers and to enhance whistleblowing provisions.

Work for regulators and other bodies

ARGA would be responsible for implementing a number of the recommendations above and would be advised by a new ‘Audit Users Review Board’ comprising solely users of audit reports. It would have to establish an independent ‘Auditor Fraud Panel’ and develop various pieces of guidance about situations where auditors would need to report or investigate further.

Other recommendations

Brydon makes a number of other recommendations on aspects such as the use of technology in audits, liability limitation agreements and transparency measures.

Brydon suggests a number of items that would require company law to be changed. These include a new requirement to disclose audit fees on the face of the profit and loss account, a change in the companies act definition of the purpose of an audit, and changes to the auditor resignation process.

The Government would also be required to review and improve the whole Companies Act including clarifying what is meant by ‘adequate accounting records’.