- Auditors should play a stronger role in identifying corporate fraud, including by showing “professional skepticism,” focusing on the risks of material misstatements and clarifying their response to wrongdoing, the International Auditing and Assurance Standards Board said.
- Auditors should also step up communication with management and “those charged with governance” (TCWG), fully describe their fraud-related procedures in the auditor’s report and follow stricter documentation rules concerning such procedures, the IAASB said in a 162-page proposal.
- “While auditors are not policemen, they can and must play a role in identifying and responding to material misstatements of the financial statements due to fraud and communicating their work to users,” IAASB Chair Tom Seidenstein said in a statement. “This proposed standard is an important step forward.”
The proposal by IAASB follows what it said is a rash in cases of corporate malfeasance worldwide.
“High quality audits contribute to the efficiency of capital markets and financial stability,” the board said in its proposal. “The public interest is best served when participants in the financial reporting system have confidence in audits of financial statements.
“However, corporate failures and scandals across the globe in recent years have brought the topic of fraud to the forefront and led to questions from stakeholders about the role and responsibilities of the auditor relating to fraud in an audit of financial statements,” according to the IAASB.
Management and TCWG hold primary responsibility for preventing and identifying fraud, the IAASB said in its proposal. At the same time, the board “believes that the focus of an auditing standard relating to fraud in an audit of financial statements should be on the role and responsibilities of the auditor.”
Clarity on professional rules is essential because “the inherent limitations of an audit related to detecting fraud can be misleading and result in a misunderstanding of the auditor’s responsibilities,” the IAASB said.
Auditors should remain alert for fraud throughout the full course of their work, the IAASB said. Vigilance is especially important “near the end of the audit when time pressures to complete the audit engagement may exist that may impede the appropriate exercise of professional skepticism,” the board said.
After detecting signs of fraud, auditors should pursue “robust, two-way communication” with management or TCWG, assigning responsibility to specific members of the engagement team for the exchanges, IAASB said.
The proposed changes to responsibilities in identifying fraud also aim to improve an auditor’s ability to determine which types of revenue, revenue transactions or assertions highlight risks of material restatement because of bogus bookkeeping, according to the board.
By setting international standards, the IAASB seeks to align global and national rules and ensure both quality and consistency, the board said.
Comments on the proposal are due by June 5.