Audit and Assurance Policy: What the newly proposed reporting requirement means for listed companies
26 May 2021
As part of the UK government’s response to the call for an audit reform, its long-awaited white paper on ‘Restoring trust in audit and corporate governance’ has set out numerous proposals to initiate a profound shake-up of the British audit market and director liability regime. One of which relates to the statutory requirement for a new Audit and Assurance Policy (AAP).
Why has this specific policy come about?
Conceptualised within the timely Brydon Review of the quality and effectiveness of audit, the recommendation for an AAP was made to help provide more clarity and visibility of how directors are ‘assuring the integrity of reporting and handling risk.’
Not only does it seek to address the extent of assurance over the information directors communicate but also better frame the role of auditors and facilitate greater dialogue between various stakeholders.
Whilst the policy is intended to encompass assurance outside of just financial reporting, it has been recognised that some assurance will evolve over time. One such example may be in the corporate reporting of ESG metrics, which are still relatively immature in their development and therefore will be more challenging if subject to formal assurance.
Whether companies have separate or combined audit and risk committees, the AAP should acknowledge which model is followed since it is designed as a unifying document that incorporates both. To complement this policy and to promote engagement on company risks, Donald Brydon suggested directors also publish a ‘Risk Report’ each year before scoping the annual audit.
Strengthening audit and corporate governance in the UK
The Audit and Assurance Policy, which would initially apply only to premium listed companies, and then later extend to other public interest entities (PIEs), will require directors to outline their approach to seeking internal and external assurance on the information they report to shareholders. This will need to be detailed over a rolling three-year forward view, providing an opportunity for businesses to disclose as a minimum:
- If and how they are obtaining assurance on reporting beyond the remit of the annual statutory audit
- How they are approaching internal audit processes
- Any policies they may have that pertain to the appointment of an external auditor
- An explanation as to whether shareholder and employee views have been accounted for in the preparation of the AAP
Though it has not yet been confirmed as to the frequency of reporting, the consultation has asked for input on the preference between publishing the policy annually or at least once every three years.
What has been the reaction to the proposal so far?
Largely, the government’s proposal for an AAP has been met with positive feedback. According to research conducted by the Institute of Chartered Accountants in England and Wales (ICAEW), 76% of respondents felt that such a policy could enhance trust in senior management and their actions. Meanwhile, 61% noted that an AAP could boost engagement with the wider stakeholder base, transcending that of just shareholders.
A further consensus emerging from the study indicated that the proposed policy could improve the value of corporate information, whilst reinforcing the crucial role of audit in providing assurance.
Off the back of its research, the ICAEW commented: ‘There is clear support for the [Audit and Assurance] Policy. It offers a real opportunity to improve trust and should be a central element in audit reform. It provides the impetus to redefine how audit and assurance are delivered, by whom, what they cover, and to what standards, igniting a debate about the roles of a wider range of existing and new providers, their competencies and potential contributions.’
How can premium listed companies prepare?
The ICAEW and Deloitte are unanimous in their opinion that now is the time to seize the moment before the government’s proposals are made mandatory.
Dr Nigel Sleigh-Johnson, Director of ICAEW’s Technical Strategy Accountability Group clarifies: 'Companies that publish and implement an Audit and Assurance Policy will provide their stakeholders with a more thorough understanding of their principal risks and instil greater confidence in the assurance activities in place to mitigate them. We are pleased to see the idea reflected in the government white paper and would encourage UK businesses to take the initiative and create their own policies as a priority.'
Following the government’s white paper, the ICAEW has since created a report that sets out the key recommendations for developing a meaningful Audit and Assurance Policy to help businesses better inform their stakeholders.
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