Government-Backed Review Proposes Overhaul of U.K. Audit Sector

The report, released Wednesday, comes after a series of high-profile corporate collapses in Britain that have led to worries about the accuracy of companies’ financial statements. It is expected to serve as a basis to actions that the U.K. government will take in 2020.

The government commissioned Mr. Brydon’s review alongside two other reviews of the U.K. audit sector.

Mr. Brydon suggests that auditors apply professional suspicion when doing their job, and that they get training in forensic accounting—a technique used to discover financial crimes—and fraud awareness. Auditors should endeavor to detect fraud and expand their audit to new areas such as alternative performance measures, Mr. Brydon wrote.

Auditors also would play a key role in assessing whether companies have the funds to pay dividends to shareholders, according to Mr. Brydon.

Audit firms should separate audit work and fee negotiation, he wrote, a recommendation aimed at addressing potential conflicts of interest.

Mr. Brydon recommended that chief executives and chief financial officers deliver an annual update to their board on the company’s internal controls over financial reporting. Companies should be required to disclose material failures of their internal controls.

Mr. Brydon also proposed holding directors legally accountable to ensure that their companies’ financial information is presented fairly, with auditors obliged to verify this.

The new regulator for the U.K. audit sector, the Audit, Reporting and Governance Authority, is expected to play a key role in enacting these changes, Mr. Brydon said. The current regulator, the Financial Reporting Council, which will be integrated into the ARGA, said it would study Mr. Brydon’s recommendations. The FRC, however, does not have a direct say in the actions that the government takes in response to the proposals.

In his review, Mr. Brydon did not address questions around the structure of the U.K. audit industry, an issue recently addressed by both lawmakers and regulators.

Parliamentarians this year suggested breaking up the audit and consulting business units of Big Four accounting firms KPMG, Ernst & Young, PricewaterhouseCoopers and Deloitte into separate legal entities to make sure that audit work would no longer be subsidized by the firms’ other businesses.

Meanwhile, the Competition and Markets Authority, the country’s competition regulator, recommended an operational split of the Big Four’s audit work, which would require firms to have separate chief executives, boards and financial statements for their audit and their non-audit businesses.

Ernst & Young, Deloitte, KPMG and PwC said they welcomed the recommendations in the Brydon report.

Write to Nina Trentmann at Nina.Trentmann@wsj.com