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Auditors need 'urgent reform'; UK review calls for breakaway from accounting

[LONDON] A year-long review into Britain's audit sector has recommended a breakaway from the accounting profession and the creation of a standalone industry with its own governing principles to root out bad practice that has rocked the sector in recent years.

Donald Brydon, a former London Stock Exchange chairman and author of the 138-page report, said the sector was in need of "urgent reform" to increase confidence in business and prevent unnecessary corporate failures.

The high profile collapses of construction company Carillion, retailer BHS and travel firm Thomas Cook has fuelled calls from British lawmakers for a shakeup of the audit market to spot problems earlier and avoid thousands of job losses.

The Brydon review, composed using more than 120 submissions and after more than 150 meetings with various stakeholders, called for a redefinition of audit and its purpose, reinforcing its role as a public interest function.

It reiterated an obligation on auditors to be "suspicious and sceptical" in their work, with particular emphasis on detecting fraud and ensuring companies could afford proposed dividends.

Mr Brydon recommended that the new auditing regulator ARGA should set new qualifications for the sector and that auditors undergo training in forensic accounting to meet new requirements to explain actions taken to prevent material fraud.

The report also said auditing work should extend beyond just examining financial statements, to reflect the wider interests of everyone who relied on a company staying in business.

Auditors should also be prepared to be more transparent about their work, publishing profits gained from clients and offering shareholders the ability to pose questions to auditors at company meetings.

"The current audit framework is made up of a mosaic of legislation, statutory and self regulation and formal and informal guidelines developed over a century. It is no longer capable of fully supporting the expectations of the users of audit," Mr Brydon said.

On Tuesday, Britain's accounting watchdog the Financial Reporting Council said it was introducing a ban on firms providing recruitment and remuneration services to auditing clients to combat conflicts of interest.