Coronavirus must not slow the pace of audit reform

Calls for audit reform are nothing new. The accounting industry’s perceived involvement prior to the collapse of companies from Carillion and BHS, to Thomas Cook, has created a clamour for change over a number of years. When 2020 began, it was slated to be a year of positive adjustment and far-reaching transformation. The 138-page Brydon report, published at the end of 2019, made no fewer than 64 recommendations on how to prevent avoidable corporate collapse and increase confidence in the audit sector. As the accountancy industry digested the recommendations made by Brydon, as well as grappling with how audit would become a profession in its own right, the world was hit by something nobody could have predicted – a global pandemic. The impact of coronavirus is yet to be fully understood, but we know it has had a profound and, in some cases, devastating effect on companies of all sizes around the world. Unsurprisingly, this has led to dwindling consulting revenues for the accounting firms at precisely the time when they are being told they need to implement wholesale change to their profession. Despite the unprecedented disruption caused by COVID-19, calls for improvement are not going away. Far from it. In the past month, as the impact of coronavirus has become worryingly clear, we have also seen the Wirecard scandal emerge, intensifying the need to improve audit quality. News that Wirecard, a company previously believed to be Europe’s most valuable financial technology group, had a staggering €1.9bn of cash missing from its bank accounts, seems emblematic of failings in audit as a whole. Fast forward just a few days and we now have a damning assessment of Britain’s audit industry from The Financial Reporting Council (FRC) whose review has revealed that a third of audits conducted by Britain’s seven biggest accounting firms were found to be “unacceptable”. The FRC inspected 88 audits conducted in the UK by leading firms and found that only two thirds were of a good standard, or required limited improvement. If this does not convince key players that we have to implement change as a matter of urgency, then nothing will. We all may face a great many hurdles as a result of COVID-19, but the pandemic - rather than limiting the speed of transformation - is instead providing the opportunity to accelerate change. We’ve seen a number of organisations ramp up the roll out of various cloud based technology solutions and there’s no reason why the audit industry shouldn’t take advantage of global conditions to effect lasting improvements using technology, rather than falling back on solutions based on out-dated frameworks and the current status quo. COVID-19 has made the need for a purpose-driven, forward-thinking audit industry more pressing than ever. In response to the demand for change, frantic box-ticking and increases in headcount are arising at the Big Four, neither of which will deliver the lasting transformation desperately required. What will create an effective, outward looking accountancy profession is a more intense drive for innovation and rapid implementation of next generation technology, with intelligent data access across all firms, regardless of size. Sadly, this is not happening quickly enough and, in many cases, it is not happening at all; due to both cultural and structural issues deeply embedded in these firms. What the industry can no longer ignore is the ongoing build to a perfect storm, where if sweeping change is not made, the fall out could impact firms in potentially even more catastrophic ways. Therefore, this is precisely the time to initiate the revolution that will make audit fit for purpose. Some shifts are already starting to happen and the impact could not be more welcome. The revelation that BDO is now the second-largest auditor of listed UK companies has shown that moves to shake up the sector are having an effect, both on the firms themselves and on boardroom attitudes more generally, which is positive. However, we still have a long way to go if we are to achieve the kind of change that will transform both the very purpose of audit and the way it should serve both clients and the wider community. Along with the introduction of intelligent data use, nothing less than a complete transformation of firms’ business models is needed for tangible, long lasting audit reform. The future of accountancy and audit is not about transactional number-crunching, but about the sound judgements that can only be made from better quality data. The good news is that the technology is already here and is starting to accelerate innovation into current and future business models. This is the only way firms’ clients will get the audit they deserve. By Shamus Rae, CEO and founder of Engine B