Audit must reclaim its Victorian roots to win back public trust

Today marks the first anniversary of the collapse of Carillion.

It is also the first day that the Business, Energy and Industrial Strategy select committee takes evidence in its inquiry into the audit market.

Carillion’s downfall brought the role of audit in business and society into the spotlight, and was a watershed moment for the profession. It revealed that audit is in danger of losing its most vital asset: trust.

So how did things go so badly wrong? And how can we fix it?

Carillion was a failure of management, not of audit. Even the subsequent joint select committee report, which did not hold back in its criticism of the auditors, stressed that the cause of the company’s collapse was “recklessness, hubris and greed” from “delusional directors”.

But the scandal still left many asking: where were the auditors? How did they fail to spot that things were so bad? What is the point of audit if it can’t do that?

And that is a failure. If society can’t see the point of audit, it may not have a future. For those of us who believe that audit is central to doing business with confidence, it demands that we act. I believe that we must go back to the very roots of the profession itself.

The first recorded mention of a public auditor in Britain is a reference to the Auditor of the Exchequer in 1314, but modern auditing began in 1844 when parliament passed the Joint Stock Companies Act.

The industrial revolution prompted rapid business growth, requiring capital and outside investments. Investors were frequently led astray by unreliable financial information and fraud was common – putting economic growth and stability at risk.

The solution was independent scrutiny by financial experts with utmost probity. When ICAEW was founded in 1880, it was granted a Royal Charter that committed it to put the public interest ahead of those of members or clients.

Audit must be about trust: enabling investors to trust the numbers by guaranteeing that they are sound, and allowing other stakeholders to trust that companies can fulfil their obligations. In turn, auditors themselves must command trust. And that has become the problem.

There is currently unprecedented scrutiny of the audit market. The Kingman review examined the role of oversight, and the Competition and Markets Authority is investigating how best to open up the market to greater competition.

These reviews are addressing areas of vital importance, but may fall short of helping audit regain public confidence. In order to do that, audit must address a far more fundamental question: what is it for?

This is an issue which the Brydon Review of Audit Standards will address – and the good news is that we have unprecedented opportunity to redefine the scope of audit.

Currently it is doing much the same job as it has since 1844, if not 1314. But technology is changing this.

Already, big data capabilities mean that we can check 100 per cent of transactions, which was previously unimaginable.

Breakthroughs like predictive analytics and artificial intelligence can use simulation and modelling to spot trends and hazards. Natural language processing can enable auditors to extract key information from millions of electronic documents.

It is quite possible that the audit of the future can become forwards as well as backwards looking.

In other words, we can once again make a profound contribution to safeguarding economic stability.

The challenge facing audit is not primarily one of process but of purpose, or at least of perception. The profession needs to ask what the public wants, and how best to serve those needs.

Audit was born out of the first industrial revolution. As we go through the fourth, perhaps the best way to stay relevant is to remember why we exist in the first place.