The International Auditing and Assurance Standards Board is proposing to toughen its rules for requiring auditors to look for signs of fraud in a client's financial statements.
The proposed revisions to International Standard on Auditing 240 (Revised), "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements," clarify the auditor's responsibilities relating to fraud in an audit. They also stress professional skepticism to make sure auditors stay alert to signs of possible fraud and exercise professional skepticism throughout an audit. The changes also aim to strengthen identification and assessment of risks of material misstatement due to fraud. The revisions clarify the response to fraud or suspected fraud identified during the audit. They increase the amount of ongoing communication with management and those charged with governance about fraud. The changes would provide greater transparency about auditors' responsibilities and fraud-related procedures in the auditor's report. In addition, the changes would increase the audit documentation requirements about fraud-related procedures.
The changes come after a number of high-profile auditing failures around the world at companies like Wirecard and Americanas.
"While many participants in the financial reporting ecosystem, particularly management and those charged with governance, have a role in preventing fraud, our standard focuses on the key role that auditors play," said IAASB chair Tom Seidenstein in a statement Tuesday. "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. This proposed standard is an important step forward."
The proposed revisions define the expectations about fraud, require stronger procedures, and increase transparency about the auditors' responsibilities and fraud-related procedures in the auditor's report.
The IAASB is asking for comments from stakeholders using a response template that's designed to facilitate a structured response and streamline feedback collation and analysis. Comments should be sent by June 5, 2024. During the consultation period, the IAASB plans to release a series of videos to help people understand the proposed revisions and their implications for strengthening the financial reporting ecosystem.
The IAASB itself has been undergoing some changes in its governance structure in recent years in response to demands from global financial regulators. The Public Interest Oversight Board said Tuesday it has established the first Stakeholder Advisory Council for the IAASB and the affiliated International Ethics Standards Board for Accountants. They were both formerly overseen mostly by the International Federation of Accountants, but the Monitoring Group, a group of international financial institutions and regulatory bodies, which includes the U.S. Securities and Exchange Commission, wanted more outside involvement by non-accountants. The SAC will provide strategic advice from a multi-stakeholder perspective to the IESBA and the IAASB on their strategies, work plan priorities and projects, and will contribute to helping the standard-setting bodies in being more responsive to the public interest.
The Monitoring Group is currently chaired by SEC chief accountant Paul Munter, who issued a statement on investor protection Monday calling for a commitment to professional skepticism and audit quality. He noted that the Public Company Accounting Oversight Board has reported a "troubling increase in deficiency rates found in its recent inspections."
Like the proposed IAASB standard, he wants auditors to do more about detecting fraud by using their professional skepticism. "PCAOB audit inspection findings also frequently identify areas of concern and deficiencies in audit evidence obtained in important financial statement areas, including revenue and related accounts, accounting estimates, business combinations, inventory and long-lived assets," Munter wrote. "Additionally, fraud is an ever-present risk, but particularly as companies face challenges, a higher risk of fraud may exist. For instance, management may be under pressure to meet earnings expectations in the face of declining revenue or increased costs. As auditors conduct their audits, they must be aware of areas of common audit deficiencies, as well as conditions that may create or change incentives, pressures, and opportunities, or facilitate rationalization for management and corporate misconduct. In the face of heightened fraud risk, auditors must consider whether a proper exercise of professional skepticism requires more persuasive evidence to corroborate management's assertions."
