Viva la audit revolution

Evolution or revolution? The answer is academic. The truth is that the momentum for audit change is building irreversibly. Stephen Haddrill, the Financial Reporting Council’s chief executive, has courageously fired the starter’s gun by saying that it is time to review “whether the value of the audit can be enhanced”. But he is not the only agent for change.

The case for change is compelling. The statutory audit report is boilerplate of the highest order. It fails to do justice to the quality of the audit processes that underpin it. The Auditing Practices Board has also recognised the need for change. ISA700 has rid us of some of the clutter in the statutory audit report. Corporate reporting is changing too. Capital markets are placing more reliance on narrative reporting and investors need meaningful assurance. Recent research on user views, led by Professor Ian Fraser of Stirling University, with support from ICAS, reinforces this point convincingly.

The importance of stewardship must not be underestimated. Investors will soon be signing up to the FRC’s proposed new stewardship code. Increasingly, their clients will hold them to account. This means they will focus more and more on the audit and risk aspects of corporate governance. Auditors need to recognise that they are the steward’s steward. They are the steward’s eyes and ears. Also, they need to remember who their client is – the shareholders, not management. Stewardship is a reporting opportunity for auditors, not a threat.

One of the more disappointing aspects of audit reporting has been the herd mentality that gravitates to the lowest common denominator, rather than the highest common factor. Today’s audit reports are undoubtedly compliant with regulation and statutory provisions but, from a stewardship perspective, one-size-does-not-fit-all. Auditors need to be more willing to assume enhanced reporting responsibilities – and be seen to do so. This will lead to more informative reports.

Audit committees have a pivotal role to play in encouraging their auditors to raise their game. They should ask their leading long-term shareholders what they want in terms of additional assurance. This never happens in the public listed company arena. Investors need to sharpen up as well. They need to clarify their views and enter into the spirit of the dialogue on a company by company basis.

We are entering an age of audit enlightenment. Change will be a process not an event but, if the big global networks resist change, the case for regulatory intervention to address the structure and ownership of the audit market will be hard to resist. Let us hope the winds of audit change are blowing from the right direction.

Guy Jubb is investment director and head of corporate governance at Standard Life Investments