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UK directors and audit reform – What’s next?

By Shamus Rae, CEO and founder of Engine B

When the Government launched its long-awaited consultation to reform audit and corporate governance in March, all stakeholders understood that the proposed reforms would be unusually complex and far reaching. This complexity accounts for the longer than usual 16-week consultation period for this White Paper, closing on 8 July 2021 and is also a move by the Government to ensure that all relevant parties have the opportunity to share their views.

With the end of the consultation period just a few weeks away now, it is interesting to see that there is still lingering controversy around some of the proposed reforms, including those designed to strengthen directors’ responsibility and accountability when it comes to internal control and risk management procedures.

As part of the consultation, views are currently being sought on three different options for achieving greater levels of accountability for directors. The Government’s “tentative preferred option” would require a directors’ statement about the effectiveness of the internal controls. Whether the statement should be assured by an external auditor, however, would still be a decision for the directors, audit committee and shareholders (unlike in the US where external auditor attestation is, in most cases, mandated).

As far as I am concerned, news that directors will be held personally responsible for the accuracy of their company’s financial statements is hugely welcome as part of a comprehensive overhaul of UK corporate governance and audit. Holding directors more strongly accountable is an important step forward, not least because it may lead to much-needed behavioural change around corporate governance. At the same time, however, we must also encourage all stakeholders (including auditors and regulators) to re-think the whole purpose and scope of audit within the context of greater availability of data and technology. 

Audit – an industry undergoing transformation 

The future of audit is no longer about transactional number-crunching, but about the sound judgements that can only be made from better quality data. We need to see a more intense drive for innovation and the rapid implementation of technology across all audit firms. 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 the industry.  

The audit industry is approaching a period of intense and far-reaching transformation, driven by digitisation, FRC regulations, innovation and intelligent data use. Trying to restore public trust in audit and corporate governance at a time when there have been so many high-profile corporate collapses including Germany’s Wirecard and the UK’s Patisserie Valerie, will not be the result of any single move by the regulator or piece of legislation. Rather, it will come about through looking at the market holistically and making forward-looking reforms.

Can AI stop audit failure?

Over the next 12 months the use of Artificial Intelligence (AI) to identify errors and fraud will be on the increase. Intelligent tools like this will create the context and visibility needed, that will make it much easier for auditors to identify fraud and avoid audit failure. The accounting industry, as external auditors but also internal auditors and financial controllers, must turn to AI to help spot fraud and to prevent further scandals damaging the reputation of the sector. This has the potential to be game-changing for corporate governance as it makes it harder for fraud and poor governance to pass unnoticed, rewarding companies which operationalise more ethical standards and engrain ethical behaviour. 

Requiring directors to report on the steps that they have taken to prevent and detect material fraud is important, but it is only part of the solution to a huge problem. We might never manage to stamp out fraud entirely, but we have the tools now to make it much harder to commit and get away with.

By Shamus Rae, CEO and founder of Engine B

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