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28 January 2019 | By John Allan Insight

We need long-term answers to the future of audit

When trust in business is paramount, CBI President John Allan asks what the future of audit should look like

This week, politicians will debate an issue that impacts just about every business in the UK. There will be arguments for change, driven by a sense that the current approach isn’t working. Many solutions will be put forward, with little clear consensus on what to do next.

And on this occasion, they won’t even be talking about Brexit. The future of audit will also be very much under the microscope in the coming days.

Auditing is one of the fundamental mechanisms to maintaining trust in a business for investors, shareholders and indeed, the wider public.

When we see high-profile corporate collapses, such as Carillion and only last week, Patisserie Valerie, it rightly prompts searching questions given the fallout for those investing in a business, its employees, suppliers and sometimes the taxpayer.

Let’s not forget that despite the recent headline-grabbing failings of some individual businesses, the UK has a well-regarded reputation on corporate governance around the world. Audit is part of that reputation. It’s a profession with highly-skilled individuals, with lots of integrity. It trains individuals who go onto careers in many parts of corporate Britain. And it makes a significant contribution to UK competitiveness at home and abroad.

But changes must still come. Not least, given the rapid pace of technology transformation and its effects on business practices – far wider than the audit industry – any changes must support a system fit for the future.

There are important questions about what that future system might look like, that need long-term answers.

We already have recommendations from the Competition and Markets Authority (CMA) to maintain choice in the market, and from Sir John Kingman on the role of the regulator. These findings have already filled in good parts of the jigsaw. The task now is to see the full picture and build a consensus about the reforms required.

The starting point must be to reach agreement on what we want from audits in the future. Unless that is clear, the admirable determination to drive change is likely to miss the problem. A false move now could stem the flows of investment to the UK in the years to come.

Fortunately, Sir Donald Brydon, the outgoing chair of the London Stock Exchange, has been asked to lead a review on exactly this question.

Audit quality should be paramount, and his inquiry should attempt to future-proof any reforms.

His review might reasonably start by asking what investors and other stakeholders want from an audit – now, and in the future – and where the current model fails to match them.

It could ask if audits are robust enough at covering the wide range of responsibilities that companies have, beyond their financial performance.

It could examine how technology can transform how we assess the health of companies. And it could ask what more might be done to provide forward-looking guidance, and whether auditors can do more to identify and head off failings in the future.

Once we’ve got the answers to these fundamental questions on what we want from an audit, we can judge how well the ideas put forward by the CMA and Kingman help move towards this future vision.

There’s plenty in here that sounds sensible. We want the audit market to be resilient and competitive. Ideas from the CMA for market share caps, robust scrutiny of audit appointments and measures to tackle any real or perceived conflicts of interest all have merit – although I detect little appetite in boardrooms for joint audits. If companies thought they were a good idea, there’s nothing to stop them being used now on a voluntary basis.

And in France, where this is required, there’s no evidence that it has added to the number of major league players.

Similarly, the role of the regulator will be key. The Kingman Review has pointed the way on this by proposing tougher, more intrusive regulation, with company directors being held to account for their actions too.

Our regulatory framework must evolve to maximise the competitiveness of the UK, reflecting the needs of investors and businesses operating in a global capital market.

Front page failures have shone a light on the UK audit industry, but it’s important to remember these are still rare cases when compared to the vast majority of reliable and good quality business audits being carried out every day.

Our politicians and regulators must keep this in mind and seek solutions that work for the long-term rather than rush to “do something”. Let’s ensure that all ideas for reform are joined-up and moving in the right direction, starting with the fundamental question; “what should be the future of audit?”

This article was originally published in The Telegraph

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