The UK accounting regulator has proposed enhanced requirements on auditors to identify fraud in company accounts, the first such reform in 16 years after a series of scandals that damaged the industry’s reputation.
The Financial Reporting Council has launched a review into the international accounting standard that sets out an auditor’s obligation to detect fraud. A proposed revision to the standard in Britain intends to “provide increased clarity” on auditors’ responsibilities to spot fraud, and to expand the requirements on an auditor to identify the “risk of material misstatement due to fraud”, the FRC said.
The collapse of Patisserie Valerie in the UK last year ignited a debate about whether auditors had to look for fraud in company accounts. The chief executive of the café chain’s auditor, Grant Thornton, said his firm was not looking for fraud when it missed a £95m black hole in the Aim-listed company’s accounts.
The debate has deepened this year following the implosion of Wirecard, the German payments processor, amid a fraud that eventually totalled €1.9bn that its auditors at Big Four firm EY missed for years.
“Sometimes the UK needs to show leadership and move in advance of international standards to address urgent stakeholder concerns in the public interest,” said Mark Babington, the FRC’s executive director of regulatory standards. “We believe that some of the misunderstandings that have been communicated around the auditors’ responsibility in respect of fraud meet this test.”
He added: “In response, we have developed a revised standard which makes auditors’ obligations clearer, enhances the risk assessment they carry out and sets clearer requirements for what the auditor then does.”
The proposed new standard, which will be consulted on until January, clarifies that auditors are required to look for fraud.
One proposed new paragraph states that the objective of an audit is to “obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud”.
The current accounting standard, known as ISA 240, was adopted in the UK in 2004 and has not been substantially revised since. It only requires auditors to “identify and assess the risks of material misstatement of the financial statements due to fraud”.
Donald Brydon, the former chairman of the London Stock Exchange, raised a number of concerns about a lack of clarity in the rules for auditors regarding fraud in his review into the quality and effectiveness of audit, which was published last year.
The FRC said the proposed new standard would address Sir Donald’s concerns. The regulator said the changes would promote a “more consistent and robust approach” to auditor responsibilities around fraud, and that they would be in the public interest.
After the collapse of Wirecard in July, Sir Donald urged faster reform in an interview with the Financial Times. “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,” he said.