Accountants warned over fraud expectations

A fresh argument has broken out over the role of auditors in spotting fraud.

An international standards body wants to consult members on the so-called expectation gap - the idea that the public expects too much from an audit.

But pensions advisor Pirc will write to the UK's big audit firms warning them to reject the consultation on how far they should go to spot fraud.

Auditors have been fined and criticised for bad work after the collapse of big companies like BHS and Wirecard.

Auditors test a company's accounts on a sample basis to make sure they offer a sound view of a business's health.

In the UK, Parliament and the courts have decided auditors should be able to spot fraud, Pirc says.

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The International Auditing and Assurance Standards Board (IAASB) said it wants feedback from its members on this expectation gap on the areas of fraud and whether a company can survive for the foreseeable future.

It asks whether auditors should have "enhanced or more requirements with regard to fraud in an audit of financial statements".

But Pirc says that in the UK at least, they already should be spotting fraud, and that Parliament and the courts have said so. Auditors such as the so-called Big Four - EY, Deloitte, KPMG and PwC - should acknowledge this, it says.

"The central premise of this consultation is incorrect because there is no 'expectation gap' under the law of many countries including the UK and other jurisdictions. In the UK, both the Judiciary and Parliament are clear on this," says a letter to the IAASB, seen by the BBC.

The IAASB told the BBC that it is "not making a judgment on whether the expectation gap should be used as a rationale for failures."

"The reality is that there are differences between the levels of expected performance envisioned by auditors and users of financial statements - that is the expectation gap," it said. "The purpose of our consultation is to move beyond the buzzwords and to inform targeted action in terms of fraud and going concern based upon a common understanding of what people want and expect of auditors."

Arguments over who should spot fraud have happened several times before. In 2019, David Dunckley, chief executive of Grant Thornton, which audited failed bakery chain Patisserie Valerie, told MPs that "we're not looking for fraud".

But Scott Knight of audit firm BDO, told MPs that auditors should be on the lookout for "sizeable" frauds.

Critics point out that auditors are meant to spot accounting holes like missing funds. And since funds can only be missing through error or fraud, they are meant to be spotting fraud, even if they don't immediately realise that is the cause of the problem.

Pirc fears that the regulator is trying to re-open an argument that the industry has already lost.

BHS's auditors, PwC, were fined a record £6.5m after signing off accounts the industry watchdog, the Financial Reporting Council, called "incomplete, inaccurate and misleading".

In its 2019 report on auditing, Parliament's Business, Energy and Industrial Strategy Committee dismissed the idea of gap between what the public expected of auditors and their job.

"We do not accept the attempts of auditors - particularly the Big Four and Grant Thornton - to underplay the role or scope of audit, nor to implicitly blame the public for failing to understand the purpose of audit," the report said.

"Rather, the firms should focus on the poor quality of their audits, and on how they are falling short of what audits are for within the current framework."

Their job already includes detecting "material fraud and making a judgement on a company's future prospects", it said.

In its judgement of a case between auditor Grant Thornton and a company called Assetco, the Court of Appeal said that the auditor "failed in its duty to identify management fraud, particularly dishonest representations and evidence provided to it by senior management in the course of the audits."

Companies above a certain size must be audited, and must provide auditors with everything they ask for. This can include an entire backup of a company's accounting system, plus evidence of deposits from banks and interviews with managers.

If information given to an auditor is knowingly or recklessly false or deceptive in something important, that can land you in prison for up to two years and with a fine.

With such broad powers of investigation, some campaigners ask why more frauds are not being uncovered.