THE coming months will be pivotal for the audit profession as important reviews of the financial reporting ecosystem in the UK and Europe move closer to a conclusion. These reviews, argues a new report, will fundamentally reshape the profession.

‘Strengthening the wider corporate reporting ecosystem: Are we entering a new audit era?’, produced by ACCA in collaboration with the Hellenic Accounting and Auditing Standards Oversight Board and the Institute of Certified Public Accountants of Greece, looks at the implications of proposals put forward in three recent documents:

• the UK’s Department for Business, Energy and Industrial Strategy (BEIS) consultation, Restoring Trust in Audit and Corporate Governance, published in March 2021

• the European Commission’s consultation, Corporate reporting — improving its quality and enforcement, published in November 2021

• the proposed International Standard on Auditing (ISA) for Less Complex Entities, the consultation period for which closed in January.

The report describes the proposals put forward as ‘radical’ and expected to ‘reshape the context in which the audit profession will operate in the future’. Its aim is to keep auditors abreast of the proposals and help them understand what the changes could mean for the profession, including the new skills that auditors will need to develop.

The proposals were formed in the wake of a series of corporate reporting failures in Europe, notably Carillion and Wirecard, but while the BEIS and EC consultations focus on public interest entities (PIEs), the report points out that the proposed ISA will have a wide impact because the global economy contains a high proportion of small, less complex entities, making up between 90 per cent and 99 per cent of businesses in individual jurisdictions. In other words, the change will impact auditors of entities of all sizes.

Scope

The relevant BEIS proposals relate to the definition of a PIE — the whitepaper proposes that the definition should be based on size and not on whether they are traded on a regulated market — and on the introduction of a new requirement for PIEs to publish an annual resilience statement. This will discuss the resilience of the business over the short, medium and long term, including the risks posed by climate change.

While the short-term discussion encompasses the existing going concern statement and will be subject to audit as before, the proposals suggest that companies should consider whether any independent assurance should be provided for the medium- and long-term sections.

BEIS also proposes that the scope of financial auditing should be expanded, suggesting that this could include a statutory requirement for auditors and directors relating to the detection and prevention of fraud.

The EC consultation is at an earlier stage but notes that there are some common themes between the two. Discussions about directors’ responsibilities could signal the introduction of a regime similar to the Sarbanes–Oxley Act, it argues. The EC’s consultation also talks about improving resilience and transparency reporting.

New skills

The report says that ‘new responsibilities, skills and disciplines are expected to emerge’ for both directors and auditors as a result of these proposals. An obligation to detect and prevent material fraud, for example, will require directors to have enhanced skills and understanding of their responsibilities, and will demand more forensic skills in auditors.

The report adds that new skills demanded of corporate auditors would include IT and cybersecurity expertise, environmental, social and governance assurance skills, and a wider understanding of company culture.

The International Auditing and Assurance Standards Board’s proposed new standard for less complex entities has been developed in response to a need, as auditors found applying ISA challenging for smaller, less complex entities. While it does not introduce radical changes to audit requirements, it is an additional challenge to auditors of smaller entities. The ISA is designed to obtain the same level of assurance as an audit under the full suite of ISAs.

The report concludes that the changes amount to a radical shift in the audit profession: “These developments, irrespective of what the outcome of each of the consultations might be, show that the audit profession is evolving, and we might be embarking on a new audit era globally.

“Audit practitioners should proactively consider emerging needs for new skill sets, learning and development. And more widely, other key stakeholders should also be closely monitoring the developments in all areas of the wider financial reporting ecosystem and what their outcome would mean for them.”

AUTHOR: Liz Fisher, journalist