Watchdogs not bloodhounds

The US auditing standard setter is poised to update its rule to include such tighter rules on fraud detection in the audit process. Given the increasingly close relationship the International Auditing Practice Board enjoys with the US standard setter, it is understood that the IAPC will follow the US lead.

Steve Maslin, head of assurance at Grant Thornton, said: ‘If we get forced down a particular route, I have a concern that management will tell us nothing.’

The Accounting Standard Board, regulators, auditors, analysts and users of company accounts in the UK are vehemently against the move after research in 1998 revealed no support for a proposal to include a forensic phase in the audit process.

What worries UK auditors is if international rules on auditing are endorsed for use in the UK by 2005. The European Commission is looking at the possibility.Graham Ward, UK representative to the International Federation of Accountants, warned: ‘The idea of a forensic phase is likely to raise expectations without benefits.’

The APB is attempting to widen the debate to show that solutions can not be found just by changing auditing standards. Corporate governance has just as big a role to play in combating fraud as auditing standards, warn auditors.

Findings on an APB consultation on ‘aggressive earnings management’ where increased pressure lead management to apply controversial accounting standards to hide debts or inflate profits, are due in the next few weeks. It is hoped the debate will begin to address these issues.

With the number of large scale fraud allegations on the rise, demands for tighter rules on fraud detection are inevitable.

But Martyn Jones, technical partner at Deloitte & Touche, warned: ‘Standards help but we need to create a culture whereby people know that if they withhold information from auditors, regulators will get tough. If not then auditors will be seen as fair game. Until we do that we won’t really start to address fraud.’Research has shown that the biggest and most damaging frauds are committed by management.

In these cases it would be highly unlikely for auditors to detect the fraud whether there was a forensic phase included in the process, UK standard setters and auditors argue.

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