It is vital for the economy that there is trust and confidence in the reliability and credibility of company financial information, and audit is a key contributor. In agreeing last autumn to take forward proposals for reforming auditor liability, the trade and industry secretary Patricia Hewitt challenged stakeholders to work together on ways to improve quality in the audit market.
The ICAEW agreed to the DTI’s request to facilitate discussions between auditors, investors, business and regulators to take this forward. The Audit Quality Forum is the result. It has no formal constitution and no policy making powers, but any recommendations will be passed to government or other appropriate regulators for their consideration.
The forum also has no fixed lifespan, but we hope to keep it in operation as long as participants feel it is making a useful contribution to the audit process and confidence therein.
We are focusing our work primarily on the audits of companies with listings on recognised stock markets, as those have the widest range stakeholders, many of them totally removed from the details of the audit process.
At the first meeting in December, a number of ideas were agreed to be taken forward to improve transparency in the audit process. Working parties were established, each consisting of stakeholder representatives, and their recommendations were considered at the forum’s second meeting on 7 March. Four sets of recommendations were considered and we will be passing these on to government and other regulators for consultation and action.
In summary, the working parties are proposing the following measures to enhance transparency in respect of audits of companies listed on recognised stock exchanges.
Questioning the auditor
There should be a statutory right for shareholders to put questions relevant to the audit in writing to auditors, and shareholders should be provided with a list of the questions submitted at the AGM. Clearly there are a number of logistical issues to be resolved, such as follow up questions at the AGM itself, and there is a risk of the system being clogged up with frivolous questioning. However, used properly, this proposal should enhance shareholder understanding.
The combined code should recommend the disclosure of the contractual terms of the audit for UK statutory audit work. While the content of an audit engagement letter is in practice relatively uncontroversial, the audit is addressed to shareholders and we believe it is important to demystify the audit relationship between the company and the audit firm.
Naming the audit partner
The law should generally require disclosure of the name of the partner responsible for the audit in the audit report. The whole audit firm remains responsible for the audit opinion as the audit will have been performed under its rules. But disclosure will help to provide greater accountability and transparency.
The law should be amended and guidance produced with the aim of improving the information made available in audit resignation letters. Currently, the information provided as to why auditors have resigned is constrained by a lack of guidance for auditors and the ability of directors to delay publication of the information. It is important for stakeholders to be aware of auditor concerns in such circumstances, where they exist.
The December meeting also agreed to set up a working party to look into competition and choice in the audit market. This working party has already commenced work, but this is a particularly complex area with different issues in different market tiers, with a number of factors restricting choice for the largest companies and complicated relationships with audit quality.
This working party is likely to continue its job for some time, but has noted that this is an area where there is relatively little evidence. The forum has agreed that research needs to be commissioned and we are looking at how this might be progressed.
As well as taking forward the project on competition and choice, the forum is going to be looking at other areas where it can make a useful contribution. The next stage of the programme has not yet been agreed but it might, for example, include exploration of the audit expectation gap (a longstanding problem), and further ways of communicating with shareholders about the audit process and its findings, including the role of audit committees in this process.
Just as transparency on the audit process is vital for public confidence, so do we believe in transparency in what we are doing.
Notes of the forum’s meetings, including attendees, are available at www.icaew.co.uk/auditquality, along with information on the forum’s working parties. You can also register an interest there and obtain copies of publications.
Gerald Russell chairs the Audit Quality Forum, is vice-chairman of the ICAEW’s audit and assurance faculty and is a partner at Ernst & Young
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