UK: Auditing - The Brydon review report and recommendations

The Brydon review's report concerning the quality and effectiveness of audit was published today: see here (pdf). It looks set to become a landmark publication in the development of the UK corporate governance framework. A list of the report's recommendations is available here (pdf). In its tone, and in the scope of the recommendations, the report calls for dramatic change. It extends beyond a narrow view of the audit process to consider the purpose of auditing (and the auditing profession) along with directors' reporting obligations and the role of audit committees.

Indeed, the report recommends the creation of a separate profession - corporate auditing - distinct from accounting, and operating within an overarching set of principles: the principles of corporate auditing.  It is recommended that the successor of the Financial Reporting Council - the Audit, Reporting and Governance Authority - should act as "midwife" for this new profession.

The report also recommends the adoption, in the Companies Act 2006, of this purpose of the statutory audit: “...to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements”.  Auditors should act in the public interest, the report states, and have regard to the interests of users beyond the shareholders. Moreover, the role of employees in the audit process is acknowledged with the recommendation that the directors seek the views of employees regarding the scope of any audit activity.

With regard to fraud, the report seeks to challenge the perception that auditors have no obligation to detect fraud and argue that they should endeavour to do so. It recommends that directors are subject to a new reporting duty: to set out the actions they have taken each year to prevent and detect material fraud. This would be subject to a corresponding duty, owed by the auditor, to state (1) how they have assured the directors' statement and (2) the additional steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.