Audit sector needs to be split from accountancy, says report
THE UK’s under-fire audit sector should be made independent from the wider accounting profession as part of sweeping reforms proposed to crack down on bad practice, a report has recommended.
A government-backed review, led by City grandee Sir Donald Brydon, warned there needs to be “urgent reform” to rebuild confidence in the sector after a raft of recent corporate collapses, including outsourcing giant Carillion, department store BHS and travel agent Thomas Cook.
Sir Donald — a former London Stock Exchange chairman — recommends the creation of a stand-alone audit profession, which should be governed by its own principles, qualifications and standards.
He also said auditing should reflect wider public interest, rather than simply verifying financial statements.
Other recommendations in the 138-page report, which comes a year after the review was launched, include improved auditor transparency, a specific focus on rooting out corporate fraud, and additional powers for shareholders to question auditors at annual investor meetings.
Sir Donald also said auditors should be responsible for ensuring that firms with weak balance sheets have sufficient reserves to pay out dividends.
The call for change comes amid a period of intense scrutiny following the high-profile failures and accounting scandals, with large publicly listed companies collapsing shortly after making hefty payouts.
Auditors have been heavily criticised for not spotting issues earlier, which could have helped prevent thousands of job losses and pension bailouts by the State.
It also comes after last year’s review of the Financial Reporting Council (FRC) by Legal & General chairman Sir John Kingman, which called for the audit watchdog to be scrapped and replaced by a new regulatory body.
Sir Donald said the current audit network had developed over a century.