The UK’s audit industry is in need of “urgent reform”, according to the findings of a year-long review into the sector.
The review, which was led by Sir Donald Brydon, a former chair of the London Stock Exchange Group, calls for the creation of “a standalone and transparent audit profession” split off from the accounting trade.
The standalone sector should be governed by “a core set of principles” established by new regulator the Audit, Reporting and Governance Authority.
Auditing, the review says, should look beyond financial statements to “reflect the wider interests of everyone who depends on the company’s ongoing viability.”
The report also calls for a “step up on auditor transparency”, with new requirements to publish details of profitability from audit work.
The sector has been under fire in recent years after a series of high profile businesses such as Carillion, BHS, and Thomas Cook collapsed.
The lack of competition in the sector has come under the microscope in a year in which the Big Four accounting firms increased their share of the UK market.
In a report in April, the Competition and Markets Authority (CMA) called for the splitting of the Big Four’s audit arms from their non-audit arms and the introduction of joint audits to boost competition in the sector.
Brydon said: “The current audit framework is made up of a mosaic of legislation, statutory and self regulation and formal and informal guidelines developed over a century.
“It is no longer capable of fully supporting the expectations of the users of audit. Audit is in need of urgent reform if we are to increase confidence in
business and increase the chances of preventing unnecessary corporate failures.”
Bill Michael, chairman and senior partner at KPMG UK, said: “We welcome this comprehensive report from Sir Donald Brydon and the recognition of the important role that audit plays in society.
“As a firm we have made a number of changes, which demonstrate how serious we are about rebuilding trust in our profession and the excellence and independence of our audit practice.
“We were the first firm to announce the discontinuance of non-audit services to FTSE 350 companies we audit, to introduce graduated findings in our audit reports and to change our governance to create a separate audit executive committee, which is solely focused on the performance management of our audit business.”
Stephen Griggs, deputy chief executive and managing partner for audit at Deloitte, welcomed the report:
“Sir Donald Brydon’s report sets out a bold vision of a future corporate reporting system and the very purpose of audit.
“Sir Donald’s report, along with recommendations from Sir John Kingman and the CMA, should be considered as one holistic package of reforms. We look forward to engaging as this progresses.”
A spokesperson for current regulator the Financial Reporting Council (FRC) said: “The FRC will study Sir Donald Brydon’s report with interest. Many of his recommendations, if accepted by the government, will have significant implications for the FRC in respect of our activities and resource requirements.
“We have already implemented a number of the recommendations of the independent review of the FRC and anticipate being involved in delivering the broader reforms to the UK audit market that the government has initiated.”