Sir Donald Brydon in his final report of the Independent Review into the Quality and Effectiveness of Audit suggested that external audit should be an independent profession in its own right and not just an extension of the accounting profession. As such, he proposed the creation of a new ‘corporate auditing’ profession.
This new ‘corporate auditing’ profession would have a broader scope and encompass all ‘corporate auditors’ including statutory auditors of financial statements, as well as auditors of other corporate information such as cybersecurity and environmental measures.
In addition, the role of the new audit regulator – the Audit, Reporting and Governance Authority (ARGA) would be to facilitate the establishment of the new ‘corporate auditing’ profession and establish its governance, principles and qualifications.
The Chartered IIA believes that careful thought and consideration should be given to establishing a corporate auditing profession as it could have some unintended policy consequences for the internal audit profession.
Notably, our main concern for this new profession is about the scope of ‘corporate auditing’ going beyond the traditional role of external audit work of providing assurance over the financial statements. Indeed, the proposed scope of the profession would also include providing assurance on areas that internal audit is engaged in such as culture, cybersecurity and ESG.
Because of this there is a risk that this could cause a conflict between the work of internal audit and proposed ‘corporate audit’ work and could possibly erode the boundaries between the two functions. In particular, we would want to ensure that the current separation between the two functions is maintained. We would also want to ensure that the new profession does not result in a significant overlap or duplication of work between external audit and internal audit.
The role of internal audit is to provide assurance on the effectiveness of risk management, internal control and governance across the business. On the other hand, external audit’s mandate is limited to providing assurance on financial statements and therefore is of limited use in assessing how well senior management is managing the organisation’s wider business risks.
Both functions are vital for the effective governance of an organisation and it is crucial that they remain independent and objective through having their own clear roles and responsibilities. It is imperative that the establishment of the new ‘corporate auditing’ profession does not erode or harm the scope and status of internal audit.
As a result, we support the view that a clear audit framework should be established as part of this new profession to help ensure that clear boundaries between internal and external audit are preserved.
Following on from our point above on the importance of preserving clear boundaries between the two professions, we believe that careful thought and consideration should be given to the name of the proposed new profession.
We propose that, in order to help to promote the separate and distinct roles and responsibilities of both internal and external audit, the new profession is instead called the ‘corporate external auditing’ profession.
The proposed creation of a new ‘corporate auditing’ profession also includes that the new audit regulator, ARGA, should establish the governance, setting of principles, education standards and authorisation of this new profession. ARGA would be the statutory body for that profession.
We agree that, if such a profession is created, ARGA should establish an overarching framework that governs the work and behaviour of corporate auditors and that standards and rules for the new profession sit within this framework. However, careful thought and consideration should be given to these principles to ensure that there is clarity and accountability between the two audit professions.
Although we broadly support Sir Donald Brydon’s recommendations in stimulating better quality audit through creating a new profession, its governance and principles need to be clear. This is to ensure that the two audit professions can effectively work together and maintain their independence and objectivity, in order to effectively fulfil their distinct and different roles.
It is evident following a number of recent corporate collapses that have been linked to audit and government deficiencies, including Carillion, that the audit and corporate governance framework should be reformed. We believe that such reform is vital in order to strengthen the UK’s corporate governance framework, to help identify issues early and prevent future collapses before they occur, as well as to restore trust and confidence in business.
Sir Donald Brydon makes several references in his report to the anxieties surrounding the current audit and governance systems and highlights the need for a new corporate auditing profession with the aim that it would stimulate better audit and accountability of auditors. However, it is crucial that the wider audit profession remains a consideration for this reform and careful thought and consideration is given to the establishment of the new profession to fully assess the impact on internal audit.
We believe that strong, effective and well-resourced internal audit functions which operate in accordance with professional standards are pivotal to ensuring the long-term success of organisations. Therefore, it is crucial that this new profession does not diminish the scope and status of internal audit as it could prove detrimental to its ability to provide assurance on the key risks organisations face and subsequently reduce the ability to play their role in helping to prevent future corporate collapses.