Tougher new standards for auditors to detect fraud are a “mixed bag”, shareholder advisory group Pirc has said.
The Financial Reporting Council tightened the rules auditors must follow regarding the detection of fraud in company accounts in a document published on 27 May.
The fresh standards require auditors to provide a “reasonable assurance” that the accounts are not misstated due to fraud.
The rules describe a “reasonable assurance” as “a high, but not absolute, level of assurance”.
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Head of corporate governance at shareholder advisory group Pirc Tim Bush told Financial News it was “a positive” that under the new standards the fraud does not need to be materially large, or even in the published accounts, for auditors to be required to recognise it.
However, he describes the rules as “a mixed bag” overall.
“It hasn’t expressed that in plain English, and the rest of the standard is still full of defensive and defeatist text stating why auditors might not be able to find fraud,” he said.
Management fraud is hard for auditors to discover, “because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override controls designed to prevent similar frauds by other employees,” the FRC document said.
Bush said: “What the defeatism overlooks is that by [the] s501 Companies Act 2006, it’s a criminal offence for any person to mislead an auditor. With that weapon under their belts, not left at home in a cupboard, auditors that proactively remind people of that would significantly reduce the likelihood of individuals passively covering for others.”
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“The problem s501 gave auditors was that it does not sit with their touchy-feely consulting model of auditing, where the objective was to gain other work from precisely the people that pose their biggest risk,” he added.
The new standards follow a series of scandals in the sector and follow comments from auditors that finding fraud in company accounts is not their job.
Grant Thornton chief executive David Dunckley was blasted by MPs in 2019 after he told a parliamentary committee it was not an auditor’s job to look for fraud following the discovery of a black hole in the accounts of cake shop Patisserie Valerie, which his firm audited.
Dunckley told members of the Business, Energy and Industrial Strategy Select Committee: “We’re not looking for fraud, we’re not looking at the future, we’re not giving a statement that the accounts are correct.”
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Mark Babington, executive director of regulatory standards at the FRC, said the development of the new standard follows “some of the misunderstandings that have been communicated around the auditor’s responsibilities in respect of fraud”.
He said the new standard “makes auditors’ obligations clearer, enhances the risk assessment they carry out, and sets clearer requirements for what the auditor then does”.
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