CRUF UK Chair, Jeremy Stuber, discusses the CRUF response to Sir Brydon’s Independent Review into the quality and effectiveness of audit.
Last month we responded to Sir Donald Brydon’s Independent review into the quality and effectiveness of audit – a welcome opportunity from the users’ perspective.
We share the concerns raised in the review that some recent corporate failures have occurred despite the fact that all these companies received clean audit opinions. This raises questions from the investment community about the effectiveness of audit and in particular the application of the going concern principle in the preparation of the financial statements.
This does not mean that we believe that auditors are as culpable for the failures as executives, some of whom appear to have attempted to make the deterioration of the business less obvious. In addition, we believe that the non-executive directors should be sceptical and independent, acting as our agents, using the auditors as their support to challenge the accounts with more rigour than could be achieved internally.
The main points that we raise are:
- An audit is conducted for current investors and potential investors also benefit. Other stakeholders will benefit from the trustworthiness of audited financial information and society as a whole benefits from trustworthy financial information through more efficient asset pricing and better capital allocation.
- The scope of the audit should remain the financial statements and not extend to the auditor to ‘vetting’ the business model. The myriad of possible assurances should not be confused with the specific assurance of the audit, which is clearly defined both in scope (financial statements) and nature (adherence to accounting standards).
- We acknowledge that there is an expectation gap, but this varies a great deal between different types of users. The expectation gap is widest for the public and some non-investor interest groups. Investors, in general, have a realistic expectation of the assurance provided by the audit of the financial statements.
- The quality of reporting could be enhanced by more public disclosure of the communication between the auditor and audit committee. This would be welcomed by users, to help us get a sense of the level of management conservativeness and the level of auditor scepticism.
Overall, we are supportive of the Review and will continue to engage with Sir Donald Brydon and his team. Ensuring the voice of the user is heard is critical and we appreciate the opportunity to articulate our feedback to help shape the evolution of the audit.
For more information and to see the full response click here.