Fraud detection: an increased role for auditors?

The Financial Reporting Council (FRC), the UK’s accounting regulator, wants to enhance and formalise the role of auditors in identifying fraud in company accounts. It has launched a consultation on revisions to the accounting standard which would represent the first substantive reform in 16 years. The FRC state that there is “ongoing concern that auditors are not doing enough to detect material fraud”.

The consultation comes in the wake of a number of high-profile corporate failures due to fraud which left many questioning why the company’s auditors did not identify the frauds in the accounts. This concern was expressed by Sir Donald Brydon, the former Chairman of the London Stock Exchange, who was commissioned by the government in 2019 to review the audit profession. In light of more recent failures in 2020, Brydon warned that the industry “must not wait until there is a market failure” before reforming the rules around auditors’ responsibilities in respect of fraud.

The FRC’s proposals would clarify that auditors are required to undertake work to detect material fraud and they would enhance existing obligations for the identification and assessment of risk of material misstatement due to fraud. The proposals include: an emphasis on the importance of staying alert to records or documents that may not be authentic; a requirement to consider whether a forensic expert is required if a misstatement due to fraud is identified; and an obligation on the auditor to conclude whether the financial statements are materially misstated as a result of fraud.

The consultation runs until 29 January 2021 and when finalised, the revised standard is proposed to be effective for audits of periods commencing on or after 15 December 2021.