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