Proposals to deal with the perceived audit expectation gap need to be framed around increasing audit quality for the benefit of capital markets and economies, says ACCA in its official response to the Sir Donald Brydon’s Independent Review into the Quality and Effectiveness of the UK Audit Market.
Consistent with feedback to previous reviews, including those conducted by the Business Energy and Industrial Skills Select Committee, Sir John Kingman and the Competition and Markets Authority (CMA), ACCA has again emphasised its long-held belief that any proposals must focus primarily on increasing audit quality, saying this is fundamental to investor and public confidence and the longevity of reform. It is also important to guard against unintended consequence. Adverse changes have the potential to impact on the attractiveness of the UK for business.
ACCA believes that change is needed, but that the successful reform of audit is dependent on the implementation of reforms across the wider reporting and governance ecosystem.
ACCA’s executive director – governance and author of ACCA’s response Maggie McGhee said: “Audit quality is fundamental to investor and public confidence and the longevity of reform. It is also important to guard against unintended consequence. Adverse changes have the potential to impact on the attractiveness of the UK for business.
“Audit can ultimately only meet the needs of the user if reporting requirements also evolve to meet their needs. The responsibilities and accountability of directors and audit committees are critical and those who fall short of these responsibilities must be held properly to account.”
ACCA believes that:
- enhanced narrative reporting, supported by wider assurance requirements by the auditor will help to address the expectation gap and demonstrate the often hidden value of audit. The next step with any proposals is to conduct an impact assessment to gauge the cumulative, additional costs of expanding the scope and purpose of an audit and wider assurance;
- directors should make a more explicit statement in respect of risk management and internal controls, especially as this is of critical value to users. The importance of risk management in an organisation is also critical to the sustainability of an entity – it is an essential element in the success or failure of organisations;
- the board, and in particular the audit committee, is essential to ensuring there is the right amount of challenge of the external auditor during the process and it is important that this challenge is transparent. The investor also has a key role in challenging the audit committee to ensure that this has operated effectively.
Maggie McGhee added: “We support the expectation gap’s inclusion in Sir Donald’s review. However, we believe there are in reality several gaps. We propose dividing the expectation gap into three components; namely, a knowledge gap, a performance gap and an evolution gap.
“We make clear in our response to this timely review that while the primary beneficiary of audit should remain the investor, audit is of immense value to other users. All participants in the regulatory and the wider profession must also do more to improve the understanding of the purpose and value of a quality audit. This must be underpinned by the exercise of professional scepticism – an essential part of the auditor’s mind-set and the cornerstone of a quality audit.”