Future of audit article

Audit reform looming

Audit quality is a growing concern globally for regulators and other stakeholders with auditors under increasing scrutiny in relation to corporate failures and scandals. In the UK these include the collapses of BHS and Carillion, fraud in Patisserie Valerie, and corruption at Rolls-Royce which have resulted in the following:

The 2018 Sir John Kingman review of the Financial Reporting Council. This recommended that it be replaced by a new ‘hard hitting’ regulator (to be named the Audit, Reporting and Governance Authority which could ban firms from auditing large listed groups)
The 2018 Competition & Market Authority update paper on the review of the audit sector
The 2019 House of Commons’ Business, Energy and Industrial Strategy Committee report on the future of audit
The 2019 Sir Donald Brydon review into the quality and effectiveness of audit.

Scrutiny and criticism is also high in Australia, including from former ASIC chairman Greg Medcraft who has warned that conflicts of interests in the auditing profession could result in an Enron scale corporate collapse (ABC interview 6 August 2019).

An Australian Senate (Parliamentary Joint Committee on Corporations and Financial Services) inquiry into the regulation of auditing is now underway and due to report by 1 March 2020. The terms of reference are wide-ranging and include the relationship between audit and consultancy services and potential conflicts of interest, the level of competition in the audit profession and audit quality.

Reform in the UK and Australia could have significant ramifications for New Zealand, especially with the increasing attention on audit quality here, eg of Fonterra and its auditors following asset write downs this year. FMA research published in May, Perceptions of Audit Quality in New Zealand, found a gap in expectations and what auditors are delivering. It found that while 68% of directors said they trusted the audit profession only 57% agreed audit was of high quality.

FMA’s plan for audit oversight

The FMA released its Audit Regulation and Oversight Plan 2019-22 in June, which sets out the following areas of focus during its audit quality reviews of FMC reporting entities:

improving audit quality
changes in auditing standards
developments in the audit profession
monitoring accredited bodies.

Audit and risk committees

In the 2019 Director Sentiment Survey 71% of directors said that the time their boards spend on risk oversight had increased in the previous 12 months (up from 64% in 2018).

The role of audit and risk committees is becoming more challenging due to the broadening scope of risk oversight and complexity in corporate reporting. In addition to the principal function of assisting the board to produce accurate financial statements many committees are also focused on non-financial reporting as per the rise of ESG requirements and disclosures, and the take up of integrated reporting and other more holistic reporting frameworks.

Oversight of non-financial risk has been highlighted in recent financial sector reviews in New Zealand and Australia. And boards today have to be across a breathtaking range of new and emerging risk issues including culture, cybersecurity, social media, conduct and ethics, health and safety, climate change, technology, modern slavery, global supply chains, data and privacy. Also contributing to this issue is the increasing trend of laws and regulations extending directors’ personal liability (discussed above and in Part 2).

Thought point

With risk issues taking up significant time on audit committee agendas, it may be timely to consider whether to have a combined audit and risk committee or to separate into two committees. This issue covered in more depth in our discussion paper Always on duty: the future board

This article was originally published in the IoD’s November 2019 Governance Update