This article is more than 9 months old

This article is more than 9 months old

Britain’s audit sector should be made independent from the wider accounting profession as part of sweeping changes aimed at preventing further scandals, a report has recommended.

A government-backed review, led by the City grandee Sir Donald Brydon, said “urgent reform” was needed to rebuild confidence in the sector after a raft of corporate collapses, including the construction group Carillion, the department store BHS and the travel company Thomas Cook.

Brydon recommended the creation of a standalone audit profession. “Auditing is too important to be left to an adjunct of another profession: it should be an independent profession in its own right, with its own governing principles, qualifications and standards,” his review said.

He said auditing should take the public interest into account, rather than simply verifying financial statements.

Other recommendations in the 138-page report, released a year after the review was launched, include improved auditor transparency, targeting corporate fraud and additional powers for shareholders to question auditors at annual investor meetings.

'Decline in quality': auditors face scrutiny over string of scandals Read more

The review, comprising more than 120 submissions and content from more than 150 meetings with various stakeholders, called for a redefinition of auditing and its purpose.

Auditors should be prepared to be more transparent about their work, publishing profits gained from clients.

The big four accountancy firms – KPMG, EY, Deloitte and PricewaterhouseCoopers – have been criticised for prioritising profits over proper scrutiny of companies during their audits. MPs accused them of “feasting” on the carcass of Carillion after banking £72m for work in the years leading up to its collapse.

Annual pay for senior auditors should also be disclosed, though Brydon acknowledged the policy may not be popular. “I’m sure that some people won’t like it, but most of the rest of the corporate sectors have delivered it for a long time, including all their clients,” he said.

The report said auditors should be “suspicious and sceptical” in their work, focusing on detecting fraud and ensuring companies can afford shareholder dividends. Carillion, for example, paid £55m to shareholders months before its collapse.

Brydon recommended auditors undergo training in forensic accounting and report annually on the actions they have taken to prevent and detect material fraud.

“You can’t have the public and the wider society relying on what they say if you don’t know exactly what their qualifications are,” he said.

While the accounting and auditing professions are closely linked, they serve very different functions. Accounting is an unregulated profession that can involve anything from preparing individual tax returns to financial statements for a multinational company. Accountants can become auditors with additional training. They are regulated and meant to independently examine corporate accounts or personal financial records.

The report also said auditing work should reflect the wider interests of everyone who relied on a company staying in business, including staff.

“The current audit framework is made up of a mosaic of legislation, statutory and self-regulation, and formal and informal guidelines developed over a century. It is no longer capable of fully supporting the expectations of the users of audit[ing],” Brydon said.

“Audit is in need of urgent reform if we are to increase confidence in business and increase the chances of preventing unnecessary corporate failures.”

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A spokesman for the Financial Reporting Council said the recommendations would have “significant implications” for the regulator if they were adopted.

“We have already implemented a number of the recommendations of the independent review of the FRC and anticipate being involved in delivering the broader reforms to the UK audit market that the government has initiated,” he said.

On Tuesday, the accounting watchdog said it was introducing a ban on firms providing recruitment and remuneration services to auditing clients to tackle conflicts of interest.