Auditors to become detectives of fraud

Auditors are finally to shoulder a measure of responsibility for detecting fraud in the companies they audit, under long-awaited standards from the profession's Auditing Practices Board.

Two new auditing standards follow years of debate in the accountancy profession over the so-called "expectation gap" - the credibility gap that exists between auditors and the public over how far the accountants should be held responsible for fraud discovered inside companies they have audited..

The problem was exacerbated during the recession when fraud was discovered in a number of large companies that had collapsed, such as Polly Peck, Robert Maxwell's business empire and Bank of Credit and Commerce International. Shareholders in particular demanded to know why auditors had not spotted the wrongdoing.

Auditors countered that their job was to make reasonable comments on the financial statements produced by their clients' managements, and not to detect fraud.

One of the APB's new standards, SAS 110, acknowledges that fraud may well involve conduct designed to avoid detection. It requires auditors, having obtained an understanding of the company and its business, to assess the risk of material fraud and to perform procedures in response to those risks. Where the public interest is affected, auditors must report to the appropriate authority.

The standards do not have the force of law but must be followed by all auditors governed by the APB, which in effect means the entire profession in the UK.

The second standard, SAS 120, covers the law and regulations relating directly to the preparation of an entity's financial statements. Auditors are expected to perform sufficient work to form an opinion on whether material rule-breaking has taken place.

Ian Plaistowe, APB chairman, said the standards established a determined and realistic approach to the problem. "We expect auditors to take a positive role in seeking material fraud or non-compliance."