Menu

Effectiveness and quality of audit

audit Print publication

26/02/2020

At the end of 2019, the long awaited report by Sir Donald Brydon of his independent review into the quality and effectiveness of audit was published. The report aims to improve audit in relation to public interest entities (PIEs), which are UK companies with debt or securities admitted to trading on a regulated market (including the London Stock Exchange’s Main Market but not AIM) as well as credit and insurance companies.

The report contains 64 recommendations which are aimed not only at auditors but at directors, audit committees and shareholders as well. In this article we will concentrate on the report’s implications for directors and shareholders.

Key recommendations for directors and shareholders

The involvement in audit by directors and shareholders is a key area of the report. Recommendations include new or enhanced disclosures in the following areas:

  • Resilience statement – a new resilience statement should replace the existing going concern and viability statements. It should incorporate an enhanced going concern statement for the short term, a statement of resilience for the medium term and consider risks to resilience in the long term.
  • Public interest statement – an annual statement which explains the company’s view of its obligation to the public interest, whether arising from statutory, self-determined or other obligations and how the company has acted to meet this public interest over the previous year.
  • Payment of suppliers – disclosures relating to the payment of suppliers should be included in the annual report and subject to audit.
  • Audit and Assurance Policy – the audit committee should publish a three-year rolling audit and assurance policy and put it to a shareholder advisory vote at the AGM.
  • Fraud prevention – a new reporting duty on directors to set out the actions that they have taken each year to prevent and detect material fraud.
  • Internal controls – a new requirement that the CEO and CFO confirm annually to the board on the effectiveness of the company’s internal controls over financial reporting.

The report also seeks to increase the role of shareholders and employees in the audit process. For example it recommends that directors should actively seek the views of employees regarding the scope of any audit activity and report back to them on how their views have been taken into account. It also recommends that shareholders should be given a formal opportunity to propose any matters that they wish to be covered in the audit. This would be based on the earlier publication by companies of their statement of principal risks and uncertainties. If audit committees reject these requests, they should explain their reasons. Finally, a standing item should be added to the agenda at the AGM to allow for questions to be put to the chair of the audit committee and the auditor.

WM Comment

It is unclear how much of the report’s recommendations will be implemented however it is understood that the government’s reform of audit is thought likely to begin during the first half of 2020.

Contacts