It would be an understatement to say that 2019 so far has seen an intense focus on the regulation and structure of the audit profession in the UK. We have previously provided our thoughts on topics including the Kingman Report and the CMA Market Study.
Audit is very much under the microscope. In July, PwC’s “The Future of Audit” report collected perspectives from audited businesses, investors and other stakeholders in the audit industry, on how the conventional notion of the audit could evolve to meet future needs. While the PwC report is well worth reading in full, the Reed Smith team have identified certain common themes emerging from the report’s findings, which present potential issues and talking points for those of us who approach the subject of audit from a litigator’s perspective.
The sense that emerges from the opinions collected by PwC is that the current conception of what is meant by an audit needs to be reconsidered, if it is to meet the needs of the various stakeholders who rely on audits. We commonly understand an audit, in the strictest sense, to be necessarily retrospective, a review and appraisal of a company’s historic financials – which, although it is required to take some account of anticipated future developments, is essentially backward-looking, subject to a few adjustments. PwC’s report is particularly interesting in that it identifies that users of audits, particularly investors, see greater value in the audit being a forward-looking exercise.
PwC’s report followed a wide consultation and series of roundtable events around the UK, at which the following were among the suggestions made by participants:
- The audit should include stronger statements regarding the risks faced by the company and how it is equipped to deal with those risks
- The auditor should provide their view on the company’s future prospects
- The 'going concern' question should be revisited every six months, and should address the company as a going concern for the next 2–3 years
- The audit should look at matters beyond the financial statements, including operational performance indicators, dividend policy, board effectiveness and company culture
These viewpoints are hardly surprising – those who rely on audits will typically want the audit to be as comprehensive as possible (just like any paying customer always wants to get as much as possible for their money!) – and PwC’s report is a valuable contribution to an important and overdue conversation about what audit is for. And, given the increased regulatory focus on audit, this conversation is not going to go away.
So, what does this mean from a litigator’s perspective?
Firstly, although the above has yet to lead to a change of direction from the courts (as to which we comment further below), if auditors are required – whether by the law of the land, or by the terms of their specific engagement – to comment on broader issues (such as board effectiveness and company culture) and provide more concrete opinions in relation to future prospects and risks, auditors are likely to be more reliant than ever on receiving extensive and reliable information from directors and management. Other things being equal, an increased audit scope means greater risk of litigation, which in turn may well increase the 'audit burden' and increase the costs involved in audit.
Secondly, it is worth pointing out that, despite the viewpoints and expectations expressed by participants in the PwC report, the strict legal duty of the auditor remains relatively narrow. The auditor is not a general insurer against risk, and Caparo remains good law. The disquiet being felt by some users of audits – expressed in the PwC report – has not yet translated into legislative reform or any move by the courts towards a broader conception of the auditor’s legal role. Similarly, recent high-profile corporate collapses are yet to bring about any changes in the law as it relates to the duties of auditors. In the next edition of Accountancy Forum, we will explore this area in greater detail.