Sir Donald Brydon's report on the quality and effectiveness of audit

This report is, in two respects, a model of its kind. It draws extensively on relevant academic research and it engages directly with those who responded to the Call for Views. Both of these features are unusual in this type of review: academic research is often cherry-picked simply to provide evidence for assertions of the authors and there is rarely any indication of how consultation responses have fed into the thinking behind the report.

I would have liked to have seen more general reflection on the role of audit in the structure of accountability. The report emphasises the role of audit in the supply of confidence (and I'm now wondering how confidence is related to what I termed comfort in my work on audit committees) but does not explore where audit sits in the investment intermediary chain, where confidence is crucial but accountability is blurred.

Another area which deserves exploration is the challenge of getting shareholders to engage: the owners/traders issue is relevant to the role of audit.

It would also have been useful to see some discussion of audit evidence: the work of Peter Wolnizer on auditing as independent authentication has been unjustly neglected.

The idea of an audit profession which recognises audit beyond the financial is interesting: this could usefully clarify the boundaries of financial audit. I remember engaging in heated discussions about the meaning of the word audit with the senior management at my university when the term "quality audit" crept into their discourse, before the publication of Michael Power's "The Audit Society". Multidisciplinary training for this new breed of auditors would indeed be essential.

The comments on the audit committee were also interesting. It is a long time since I interviewed AC members but it is clear that the demanding role placed on members has increased greatly. I remain baffled as to how anyone can chair, or even be a member of, more than one large and complex plc AC. The proposal that membership should be broadened away from those with a purely financial background is important but more needs to be understood about AC dynamics before further requirements about membership are introduced. The suggestion that NEDs don't fully understand the role of external audit is worrying.

I found this interesting:

"10.2.2 A simple mechanism to enable the workforce to raise issues around risks and assurance should be developed in each company, so that the designated director (or other mechanism) be the recipient of those inputs. The company should then have an obligation to respond to the workforce as to the way in which it has reacted to their requests."

I remember interviewing internal auditors in the 1990s about the processes underpinning risk reporting: at least one FTSE 100 company at that time had such a system and based its determination of its risk universe on feedback from employees. 

Two parts of the report made me cheer.

"18.0.3 In essence, it can be argued that there are no correct values as these all depend on informed estimates about the future of one kind or another." If only this was more widely recognised!

Numbers carry a misleading aura of certainty: Ted Porter analysed this effect in "Trust in Numbers" but it is rarely explicitly discussed in the context of financial reporting.

And this:

"26.1.5 It is too seductive for people to retreat behind a best practice defence of their actions. What matters is that the right practice has been followed and that may well be different in different companies and at different times. What matters is what is right for a particular company, with its particular problems and its particular management at this particular moment given its particular circumstances. Best practice concepts drive out innovation as it is always safer to go with the herd and claim that an action is best practice rather than take a bolder and individual step. Best practice defences are based on backward looking analysis. Of course, good practice must be faithful to an enduring set of principles. "

I have long believed that the words "best practice" are very misleading. Who decides what best practice actually is? 

We need to acknowledge the contextual nature of financial reporting and thus of audit. Standardisation implies homogeneity but companies are all different. Why shouldn't audit approaches differ too, depending on the context? 

And where does the role of judgement fit in? I have only looked at a few of the consultation responses so far but I was very struck by the one from Andrew Likierman in which he provides a very useful framework for the analysis of professional judgement.

It will be very interesting to see how this important report is taken forward. The demands placed on the future ARGA are very significant: ideally the design and constitution of ARGA will take these recommendations into account.