‘Tick-box’ fears over FRC’s revised auditing standard on fraud

Regulatory amendments around fraud risk adding to an auditor’s “already extensive” responsibilities.

The Financial Reporting Council (FRC) announced on May 27 a revision to its UK auditing standard on the responsibility of auditors relating to fraud, known as ISA (UK) 240. The FRC’s revisions are aimed at tackling issues around clarity on auditor’s obligations in relation to fraud that were highlighted in Sir Donald Brydon’s review of the sector.

The revisions include enhancements to the requirements for the identification and assessment of risk of material misstatement due to fraud and the procedures to respond to those risks. However, Kyle Gibbons, managing director Europe of Confirmation (part of Thomson Reuters) said in an email he was concerned the revisions would not significantly increase the chances of fraud being detected.

“I’m concerned that the FRC’s revised ISA (UK) 240 standard may add to the auditor’s already extensive ‘tick-box’ requirements, without significantly increasing the chances of them detecting material frauds at the entities they audit,” he said.

The role of auditors in preventing fraud scandals that hit companies like Wirecard, Patisserie Valerie and Luckin Coffee in recent years has been a subject of fierce debate, with figures such as Grant Thornton’s chief executive David Dunckley telling MPs in 2019 that “we are not looking for fraud”. Meanwhile, Brian Fox, president and founder of Confirmation told Accountancy Age in September 2020 that auditors must “stop pretending it’s not our job to catch fraud”.

Elsewhere, Paul Stephenson, managing partner for audit & assurance at Deloitte welcomed the revisions, saying in an email that it was one of several “important steps” needed to provide clarity around an auditor’s responsibilities when it comes to stopping fraud.

“We recognise that auditors have an important responsibility in identifying material fraud. We are supportive of strengthening both fraud awareness and auditor challenge in the profession through qualifications and continued development,” he said.

However, he called for more to be done by the FRC and the government’s Business, Energy and Industrial Strategy (BEIS) department to move beyond just focusing on the role of an auditor.

“As the responsibilities of auditors are strengthened and clarified, we hope to see the FRC working with BEIS so that similar consideration is given to the responsibilities of management and those charged with governance.”

The FRC’s Mark Babington, executive director of regulatory standards said in a statement that it was important for the UK to show “leadership and move in advance of international standards to address urgent stakeholder concerns in the public interest” and that it was necessary for the FRC to tackle prior “misunderstandings”.

“We have developed a revised standard which makes auditors’ obligations clearer, enhances the risk assessment they carry out, and sets clearer requirements for what the auditor then does,” he said.

 

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