Global menu

Our global pages


Final Report of the Brydon review into the quality and effectiveness of audit published

  • United Kingdom
  • Corporate - International corporate knowledge briefing



On 18 December 2019, the Government published the final report of the independent review undertaken by Sir Donald Brydon into the quality and effectiveness of audit (Report).

The Report contains recommendations which are intended to improve the audit standards for ‘Public Interest Entities’, which in this context includes UK companies with debt or equity securities admitted to trading on a regulated market (so includes companies on the main market but not on AIM), and credit and insurance firms. The Report suggests that, in the interests of proportionality, some of the recommendations should apply initially only to those companies in the FTSE 350.

The Report includes 64 recommendations in total. There is a summary of the conclusions contained in the Report, but some of the key recommendations are summarised below.

Audit purpose

The Report recommends that a new definition of the purpose of audit be adopted, to reflect its role as a public interest function that demonstrates more than compliance with laws and rules. Brydon proposes the following definition:

“‘The purpose of an audit is to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements.”

Ideally, this definition would be enshrined in the Companies Act 2006 (CA 2006).

Audit profession

There should be a new profession of corporate auditing, distinct from accounting, and which is governed by a set of overarching principles. It is recommend that the new statutory body to replace the Financial Reporting Council, the Audit Reporting and Governance Authority (ARGA) should facilitate the establishment of the new profession. The Report proposes a set of principles – the Principles of Corporate Auditing.

The Report further proposes that ARGA should revisit the existing definition of professional judgement with a view to strengthening, and demonstrating better, the use of judgement in audit.

The Audit Report

Brydon recommends that “true and fair” be replaced in company law with the term “present fairly, in all material respects”.

Directors’ reporting

In order to frame the auditor role and clarify the extent of assurance in relation to the information auditors communicate, the directors should present to the shareholders for an advisory vote a three-year rolling Audit and Assurance Policy. This should indicate their approach to auditor appointment, the scope and materiality of all auditing, the assurance budget and the audit relationship to any identified risk.

Directors should also publish:

•  their statement of principal risks and uncertainties before determining the scope of each year’s audit, and seek shareholder views;

•  a Resilience Statement, which would replace the existing Going Concern and Viability Statements; and

•  an annual Pubic Interest Statement.

Role of shareholders

There are a number of recommendations intended to enable shareholders to influence the scope of the audit and hold the Audit Committee and auditor to account, including:

•  a process to give shareholders an opportunity to propose any matters they wish to be covered in the audit; and

•  a standing item on the agenda at the AGM to allow questioning of the Audit Committee Chair and the auditor.

Other stakeholders

The Report recognises the importance of the statutory audit report to stakeholders other than shareholders. The recommendations in this regard include:

•  a statement in the Principles of Corporate Auditing that auditors act in the public interest and have regard to the interests of the users of their report beyond solely those of shareholders;

•  a new section in the audit report where the auditor states whether the director’s section 172 CA 2006 statement is based on observed reality, on the basis of the auditor’s knowledge of the company and its processes;

•  that directors actively seek employee views regarding the audit scope and report back to them on how they have taken their views into account;

•  the statutory auditor should be added to the list of ‘prescribed persons’ under the Public Interest Disclosure Act; and

•  bringing existing company disclosures on supplier payment performance into the annual report to be subject to a level of audit as described in the company’s Audit and Assurance Policy.


The Report considers that auditors should endeavour to detect fraud. Recommendations include:

•  a new directors’ reporting duty to set out the actions they have taken each year to prevent and detect material fraud;

•  a corresponding new duty on auditors to set out in their report how they have assured the directors’ statement on material fraud, and what additional steps they have taken to assess the     strength of the relevant controls and to identify any such fraud; and

•  the establishment of an independent Auditor Fraud Panel to judge auditors’ culpability in a manner similar to that followed by the Panel on Takeovers and Mergers.

Recommendations of the Kingman Review

Whilst not central to the Report, there are some suggestions on other areas highlighted by Sir John Kingman’s review of the FRC, particularly around the effectiveness of internal controls reporting.

This includes a recommendation requiring directors, when proposing a dividend, to make a statement that the payment in no way threatens the existence of the company in the ensuing two years and that this dividend is within known distributable reserves. For a company where it is likely that distributable reserves are deemed ‘similar’ in size to a proposed dividend, the Report recommends the directors can only recommend that dividend if the level of the distributable reserves is established and payment of that dividend is consistent with the directors’ obligations under CA 2006 and consistent with the Resilience Statement. These distributable reserves would be subject to audit.

Auditor Transparency and liability

The recommendations in the Report around greater auditor transparency include:

•  audit firms should ensure a clear separation between the team which negotiates the audit fees and the team which carries out the audit;

•  audit firms to publish the profitability of their audit work, and also the remuneration of their Senior Statutory Auditors and the performance measures around that remuneration;

•  auditors to disclose the hours spent on each audit by each grade within the audit team; and

•  clear reasons to be given for any resignation, dismissal or decision not to participate in a retender, and auditors and companies should answer relevant questions in a general meeting.

As regards liability, Brydon recommends that company law be amended to provide that any use of Liability Limitation Agreements, proposed in good faith, does not represent a breach of directors’ responsibilities.

What next?

As the Report recognises, the UK Government will need to consult on the detail of the changes proposed, and it is for the Secretary of State for BEIS to determine how the recommendations can best be implemented. The Report considers that the ARGA should be responsible for driving the recommendations of the Report which do not involve a change in the law. The Report also notes that the Principles of Corporate Auditing should apply to the auditing of all companies, whatever the structure of their ownership.

The legislative measures proposed in the UK Government’s agenda for the current parliamentary session include developing proposals on company audit and corporate reporting following the Brydon Review, the Kingman Review and the Competition and Market Authority’s report on proposed reforms to the statutory audit market.

Brydon suggests that a follow-up review take place in 2025 to assess how the recommendations in this Report, those from Sir John Kingman and those from the Competition and Market Authority’s report on proposed reforms to the statutory audit market have been implemented.

If all the recommendations in the Report are adopted, they will result in considerable changes to the work of the Audit Committee. Although these changes are targeted at Public Interest Entities and may only be applicable to the FTSE 350, they may be adopted more widely. The Report notes that many of the recommendations will have much wider application, either on a statutory, regulatory or voluntary basis.

Useful links

Final Report of the Independent Review into the quality and effectiveness of audit

Independent review: list of recommendations

Brydon Review web page