The Auditing Practices Board this week launched a major publicauditor responsibility. consultation on how far auditors should be held responsible for detecting fraud.
APB officials hoped the exercise would close the ‘expectations gap’ between public expectation and auditors’ actual ability to spot and prevent it.
Perceived failings in the audit process, including the collapse of BCCI, have created numerous legal and disciplinary actions against leading accountancy firms. The APB studied 23 cases to find suggestions for changes to rules governing auditors and fraud.
John Magill, senior partner at Deloitte and Touche, led the APB’s working party. He said the research indicated most major frauds were difficult for auditors to spot after the collusion of directors and top managers, often with third parties.
Most, he added, were perpetrated with the intention of inflating profits or reducing losses, rather than for individual gain.
Ian Plaistowe, APB chairman and Arthur Andersen partner, said greater pressure on management to produce results and the growth of profit-linked incentive payments increased the problem.
‘The APB is seeking to establish whether society has an appetite for change and, if so, its preference for what that change should be.’
Areas for change include boosting the effectiveness of audits through standards, expanding the auditor’s role and increasing the responsibilities of companies and directors to detect fraud.
COMMENT: JON GRANT, APB TECHNICAL DIRECTOR
There is growing international interest in the effectiveness of the statutory audit to detect fraud. The Auditing Practices Board issued standards in 1995 and recently undertook research to establish whether they should be revised. The findings were mixed.
Since SAS 110 was introduced, auditors’ awareness of fraud has increased and audits are more robust. But analysis of recent cases also showed the vast majority of frauds material to financial statements involved directors and senior management of companies concerned. Such fraud is difficult to detect as it usually involves wilful misrepresentation to auditors.
The APB is concerned that expectations of users still exceed what auditors can deliver. Should it seek to raise auditing standards, and thereby increase costs for all companies? Or should it maintain the status quo, knowing auditors may be criticised if frauds come to light that have not been detected as part of the audit?
A more effective response may be to increase emphasis on fraud prevention.
This would suggest changes to company law and corporate governance arrangements were higher priorities than changes to audit. When deciding on priorities, the whole community needs to consider the appropriate balance between increasing regulation and preventing fraud, and encouraging a business environment which promotes commercial success.
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