The architect of sweeping reforms to the UK audit profession has called on the government to accelerate an overhaul of the sector in the wake of the Wirecard scandal, in which a Big Four accounting firm failed to uncover a €1.9bn fraud for several years.
“We must not wait until there is a market failure, there has to be a whole mindset change on what is the purpose of an audit,” said Donald Brydon, former chair of the London Stock Exchange, who was commissioned by the government to review the audit market last year.
“Another couple of big scandals and suddenly you have a global audit profession that is entirely in disarray because choices become more limited or there are knee-jerk reactions.”
EY, which had audited Wirecard since 2009, is facing lawsuits by investors and a regulatory investigation over its failure to uncover fraudulent bank balances and transactions at the German payments company, which at its peak was worth €24bn.
Wirecard filed for insolvency last week and its chief executive has been arrested and released on bail.
EY failed to conduct routine audit procedures to verify Wirecard’s bank balances, which could have uncovered the fraud, for at least three years. The accounting firm said that “third parties, with a deliberate aim to deceive, provided EY with false documentation” during its most recent audit of Wirecard’s financial statements.
Mr Brydon said: “Given the focus on Wirecard, making it clear that auditors have an obligation to find fraud rather than stumble over it would be a smart move to change auditor behaviour.”
His report into the UK audit profession, which was handed to the Department for Business, Energy and Industrial Strategy in December, proposed that accounting standards were overhauled to include a requirement for auditors to “endeavour to detect material fraud in all reasonable ways”.
Currently auditors are obliged only to confirm that company financial statements are free from material misstatements “whether caused by fraud or error”.
Mr Brydon also proposed that auditors should be taught forensic accounting methods and “fraud awareness”.
The collapse of Patisserie Valerie last year ignited a debate about whether auditors must look for fraud in company accounts.
The chief executive of the café chain’s auditor, Grant Thornton, said an audit was “not designed to look for fraud”. Grant Thornton failed to uncover a £95m black hole in the company’s books.
The government had been expected to consult on Mr Brydon’s 135-page report on reforming the audit market this year, but delays owing to ministerial changes, lobbying by accounting firms and most recently, the coronavirus crisis, have slowed planned changes to the sector.
The government has yet to publish its response to a report by the competition watchdog that called for the Big Four firms of KPMG, Deloitte, PwC and EY to be broken up. It has also been criticised for delays to introduce legislation that would create a new audit regulator.
“It would be very apt at this time for the government to lay out its plans and timing for reforming audit,” said Mr Brydon. “There are many in the accounting profession who genuinely want reform, but there are also others who are in denial and want to put the blame somewhere else.”
Beis had not responded to a request for comment when this article was published.