LONDON (Reuters) - British accountants could be required to look for fraud at companies they audit under proposals made in a government-backed review of recent corporate scandals which went undetected.
Lawmakers called for a shake-up of auditing after the collapses of construction company Carillion, retailer BHS and travel firm Thomas Cook and commissioned a review by former London Stock Exchange chairman Donald Brydon.
The main target of reforms are EY, KPMG, Deloitte and PwC, the “Big Four” that audit nearly all global blue chip companies and Brydon’s report calls for urgent reforms to increase confidence in business and prevent needless corporate failures.
These include requiring company directors to state each year what they had done to prevent and detect fraud, which auditors would then have a duty to check.
“This challenges the perception that auditors have no obligation to detect fraud,” the 138-page report said.
Brydon’s is the last of three such reviews into accounting, with the first by the Competition and Markets Authority into audit, and the second by John Kingman into regulation.
Many of their recommendations need legislation to implement and it is unclear if all of them will make it into law, with British Business Minister Andrea Leadsom saying they “will help inform our reform of audit early next year”.
Brydon’s review, using more than 120 submissions and after more than 150 stakeholder meetings, called for a redefinition of audit, reinforcing its role as a public interest function.
“A consensus around what an audit does, and doesn’t, do and whose purpose it serves has been long overdue,” Deloitte said.
The review reiterated an obligation on auditors to be “suspicious and sceptical” in their work, with particular emphasis on detecting fraud and ensuring firms could afford proposed dividends, a lesson from the collapse of Carillion.
The Institute of Directors said the amount of dividends paid to shareholders was a controversial issue and it backed the recommendation to oversee justification of these pay-outs.
The “going concern” statement, whereby auditors sign off on a statement that a company can stay in business for the near term, should be expanded into a “resilience statement” that considers longer-term threats to solvency.
Brydon recommended that the new auditing regulator ARGA that will replace the Financial Reporting Council (FRC), should set new qualifications and that auditors undergo training in forensic accounting to meet new requirements.
The report also said auditing 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, publishing profits gained from clients and offering shareholders the chance to question them at company meetings.
Reporting by Sinead Cruise, editing by Iain Withers and Alexander Smith