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Audit and fraud: all stakeholders must up their game

19 February 2021: Auditors can and should do more to address the growing scourge of fraud, but they are only part of the solution and a more joined-up response from other stakeholders is needed to make meaningful progress.

ICAEW’s response to a discussion paper from IAASB urges the international auditing standard-setter to engage with investors and companies as it considers how the International Standards on Auditing (ISAs) related to fraud and going concern should be updated.

In its representation, ICAEW argues that IAASB should focus less on analysing the expectation gap - the gap between public perceptions of the role of the audit and the auditor’s responsibilities in a financial statement - and more on the need for an intelligent, joined-up response from companies, investors, auditors, audit regulators and standard-setters. In other words, auditing standards are just part of the solution.

Katharine Bagshaw of ICAEW’s Audit and Assurance Faculty said the real issue is that all stakeholders, including investors and auditors, need to up their game to make sure fraud and going concern issues are better understood, managed and reported.

ICAEW is calling on IAASB to better understand the kinds of fraud disclosures investors want in their audit reports, how they want audits scoped and what they are prepared to pay. “We need a much more nuanced discussion about the two very complex issues of fraud and going concern, because of investor calls for more nuanced reporting. More effort needs to go into understanding what this really means in practice,” Bagshaw said. 

“If you want more nuanced reporting, you’ve got to do a lot more than just changing auditing standards,” Bagshaw added. “You need changes to how companies report and a better understanding of the fact that neither fraud nor going concern are always binary issues. What is or isn’t a fraud is not always obvious until the courts have weighed in and technically insolvent companies can limp on for years before they cease to be going concerns.” 

In its IAASB representation, ICAEW also noted a view that little will change in this area until Sarbanes–Oxley (SOX)-style reporting by companies and auditors on internal controls over financial reporting becomes more widespread. “We anticipate that the BEIS consultation on audit reform will have a recommendation for SOX-style reporting for the UK,” Bagshaw said.

The Financial Reporting Council has proposed some very limited amendments to ISA (UK) 240 on fraud to address some of the concerns expressed in the Brydon review published in December 2019. ICAEW’s response suggests that while the proposals have value, it would be better to wait until a more root and branch review takes place. 

Among other things, the Brydon review suggested a requirement for directors to state the action they have taken to detect material fraud and for auditors to report on that statement. Brydon also recommended that the audit regulator maintain an open-access register of fraud and establish a fraud panel to sanction auditors. Concrete proposals are expected in the BEIS consultation.