In the second part of Accountancy Age’s exclusive interview with Sir Donald Brydon, we hear how the same concerns with audit expressed in 1992 have not changed much since, the need to make audit a more attractive profession, fraud, technology and academia.
In December 2019, Sir Donald Brydon’s highly anticipated report into the quality and effectiveness of audit in the UK was released. Within its 138 pages, Brydon made 64 recommendations to the government and the UK’s audit regulator on how to improve the much-maligned industry.
In the first part of Accountancy Age’s interview with Brydon, he discussed his report and its conclusions, the importance of ARGA, the importance of language in audit and raising the bar for auditors, clarified a comment taken out of context and said we are now in last chance saloon for the industry.
In this second part, he discusses how the problems associated with audit have not changed in a long time, how he set about planning to compile the report, how to make audit a more attractive profession, finding fraud, technology and academia.
When asked how he came to be chosen to undertake a report into the quality and effectiveness of audit in the UK, Brydon says “other people probably have to answer that question. There was nothing magical about it – I wasn’t sitting thinking, ‘golly, I’d like to write a report about audit.’”
He confesses that when he was first asked, he didn’t feel he knew enough about the subject despite being around it for a long time.
Brydon had been on the original Auditing Practices Board board with John MacFarlane, who undertook his own review into “The Future Development of Auditing in the United Kingdom and Ireland” in 1992, something that Brydon describes as still being relevant today.
In Brydon’s report, he lists anxieties about audit that were highlighted in the MacFarlane report, writing:
The theme that history was doomed to repeat itself was echoed by Brydon when talking at a press event earlier in the process of compiling the report.
“We did a party piece earlier in the process when we launched the call for reviews. I put up a slide of the things that were wrong with audit, and I said to a room full of auditors – that’s what’s wrong. And they all nodded wisely,” he recalls.
“And I said you might like to know that comes from the 1992 McFarlane report. That can’t happen again. If that happens again, it would be desperately bad news for the auditing profession.”
The gauntlet was thrown down to the accountancy profession at the event to return their views on audit, but before that, work had to be done to determine what questions needed to be asked to get the necessary information from stakeholders to compile the report.
“The first step was to work out what questions we wanted to ask. So we worked through what key areas would be helpful to get information about,” he says. “We did that quite early. Then we set about working out how to bring those questions and the background information that we would need to be provided in the process. We spent the middle of January to the middle of March, working out the consultation document.”
Brydon explains that unlike with some reports where the desired conclusion is already determined, he went in with an open mind with no preconceived ideas.
“This set out the framework of what was to come later. But I didn’t start with a very clear idea about what the conclusions should be. Some people write these reports on the grounds that they know what the answer is. They just justify it. I did it exactly the other way around. I didn’t know what the answer was, and I wanted to make it a data and evidence-based process.”
Once the consultation document had been established, it was launched on 10 April 2019, kicking off a process that saw Brydon hold over 120 meetings and receive 2,500 pages of responses from stakeholders.
From the consultation, Brydon compiled 64 recommendations (although there are more if you read between the lines) outlined in his report, made up of a combination of suggestions made to Brydon and his own conclusions.
The core focus for Brydon was to consider what users of audit want. These take the form of company stakeholders, such as shareholders or investors, to be able to determine their confidence in a company and inform their investments.
Discussing the results of the consultation, he says: “There was a lot about box-ticking – a lot of anxiety that so much of audit is about obeying rules. It’s a bit like the law. The law is about, obeying the rules of the law, it’s not about justice.
“In a similar sort of way, ‘we want to know whether this company is in good shape’, is basically what people want out of audit. What they were getting was a completely different answer – like the little poem said!”
“What do the users of audit want? – They want to be informed. And if auditors begin with the mindset that the core purpose of audit is to inform people about the company they’re investing in or dealing with, then that changes the mindset dramatically from one which says ‘our duty is to say things that obey arcane accounting rules.’”
This shift in mindset is at the core of Brydon’s report. As covered in the first part of the interview, the quite drastic steps recommended by Brydon to make an audit profession in its own right, separate from accountancy, are geared towards changing the focus of audit, ensuing that auditors think about the users, rather than their clients.
Auditing has traditionally been viewed as a monotonous task, one that junior accountants do for a few years before moving into other fields of accounting.
Should Brydon’s recommendation to separate audit from accounting be executed by the government and ARGA, how can audit be made an attractive prospect if it sits outside the profession it currently resides?
Using an analogy, Brydon says that in the form he has laid out in his report, this wouldn’t be a problem: “In its present form – if all audit is doing is looking at pictures, and saying yes, there’s six dogs, five cats and a moon in this picture, it isn’t terrifically exciting work.
“If, on the other hand, it’s to say, actually, ‘that picture is a really interesting allegory because it tells you about the future of the planet, or how animals behave at night,’ or whatever it is, then it becomes really informative and really interesting.”
He believes that if auditors have more responsibility to think about the resilience of a company and its future, advise based on their findings, and add value to the user, then it will become a much more interesting and rewarding profession.
“And if the job becomes more interesting, I think you could see, steadily, auditing become more attractive, and a profession in its own right,” he says. “With new skills, such as forensic accounting skills required of auditors today, it can become a destination, rather than a stopping point in that journey.”
“A phrase that some people don’t like is that audit should add value. I think the users of audit should feel when they’ve read an audit report that they know more about the company than they did before. Whereas if it’s just a confirmatory document, then it probably doesn’t add very much value.”
Forensic accounting is currently left to forensic accountants. In Brydon’s new vision for audit, auditors would also likely have to undergo forensic accounting training to help them when they think they may have come across fraud.
There is a school of thought that believes that auditors should not be responsible for finding fraud. This view has been expressed by Harry Goddard, CEO of Deloitte Ireland, as recently as October 2019, when he said: “Statutory auditors, working essentially to a 175-year-old model and a set of responsibilities laid down in law, are not fraud investigators.”
But Brydon’s new model would mean that the 175-year-old model Goddard references is no more, and that it would be well within an auditor’s remit to uncover fraud, when they can. ‘When they can,’ however, is a key point.
Why does Brydon think some don’t want auditor’s to be responsible? “Oh, Fear. It’s the anxiety that you can’t prove a negative. They run away from it altogether. It isn’t what the users want, that’s clear. But, having said that, there needs to be a clear understanding that not every fraud is findable,” he says.
“It is not a complete failure of auditing to fail to find a fraud. That is why I came up with this concept of something parallel to the takeover panel, where a body has such eminence that its views are accepted and understood by everybody.
“And indeed, that the courts defer to it is important, will make a judgement as to whether in the case of the inability to find a particular fraud that it was reasonable not to find it.”
There are some instances, Brydon says, that fraud should be easier to uncover, and inexcusable to miss. Some frauds, however, are far more challenging to discover, and there must be an understanding that while it may be within an auditor’s remit to find it, it’s not always possible. By its very nature, it’s well hidden, and is only clear when something drastic occurs, such as a company’s collapse.
“If it’s just a question of some cash missing, under normal circumstances, it wouldn’t be defensible to say ‘we failed to find that.’
“On the other hand, there are some sophisticated frauds around, and you could hunt in the time available for an audit, you could hunt and hunt and never get to them. But what you would have to do is prove and show what work you have done.”
Another of his recommendations is for there to be a register of fraud created that shows all recorded frauds that can be referred to, and so that there is a better chance of catching it next time it occurs.
Elaborating on the difficulty of finding fraud for the auditor, he says: “Generally, frauds gets found when there’s a consequence to it. It’s only when large amounts of money have been stolen by an incredibly sophisticated process, one day, it will be uncovered.”
A chapter of Brydon’s report is devoted to technology. He describes how technology has advanced significantly to allow auditors to analyse large quantities of data, particularly to find irregularities that indicate potential fraud.
He calls on the curriculum for the new profession he recommends is formed to play a key role in ensuring that trainee auditors are well versed in new technologies, while saying ARGA “will need to be alert to the evolution and role of algorithms as more reliance is placed on them.”
He also sees technology as a way to eliminate the more monotonous tasks involved in audit, thus freeing an auditor’s time to add more value to their output.
Speaking on the different ways in which technology can help in audit, Brydon said: “One is the elimination of purely routine work can by a machine. I think firms are well advanced in that area. I did note in the report there were some obstacles to progress, however.
“The second part is around the use of machine learning, artificial intelligence, ways of creating patterns with data, using data to identify outliers. If you’re going to be hunting for fraud, AI is a really important piece of the jigsaw.”
He ponders the possibility of audit firms collaboratively developing software that they could all use, but says that for this to happen, it would have to be demand led.
“I’m intrigued to see whether each firm will develop its own systems or whether they will have to come together to create some utility of clever systems that they’ll draw together. Again, that’s for the marketplace to work through.”
Brydon would also like to see more interaction between academia and the industry. In his process of compiling the report, he says he read a lot of academic papers which he “would never have read otherwise” and found that there was a disconnect between academics and having an understanding of what actually happens at accountancy firms in terms of audit.
“I got the sense that a lot of academics, very bright, very able, were sort of sitting outside the system, looking in, and yet, they’ve got so much to offer in terms of the way in which they think about audit, and it would be very helpful to create the mechanisms for those interactions,” he says.
The same can be said for investors as well. “This is an interesting subject once you get interested in it, but unless you’re tempted to be interested in it, it’s quite easy just to pass it by.”