The Irish accounting watchdog is planning to put a greater onus on auditors to look for potential fraud in company accounts, following on from developments in the UK following a series of financial scandals.
The Irish Auditing and Accounting Supervisory Authority (Iaasa) issued a consultation paper on Monday on its plans to tighten requirements on auditors as they assess companies’ financial statements.
The body wants to amend a current audit standard known as ISA 240 to require auditors to “obtain reasonable assurance” that company accounts they are looking into do not mislead due to fraud.
It follows on from the UK’s Financial Reporting Council’s (FRC) move in May to insert this requirement into its auditing rule book.
“In line with Iaasa’s policy to adopt the UK standards, Iaasa intends to adopt the revised standard with minimal amendments and does not propose to add any new Irish requirements to the changes made by the FRC,” the Irish authority said in the consultation paper.
Iaasa said it plans to inset a paragraph into ISA (Ireland) 240 clarifying that “while the risk of not detecting a material misstatement resulting from fraud may be higher than the risk of not detecting one resulting from error, that does not diminish the auditor’s responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement due to fraud”.
The greater focus on the role of auditors in detecting fraud and rule tightening stem from recommendations in a report written by former London Stock Exchange chairman Sir Donald Brydon in 2019 on the state of auditing, in the wake of the failures of cafe chain Patisserie Valerie and construction firm Carillion.
However, auditors have long argued that there is a so-called expectations gap between what they see as their role and what is expected by the public, politicians and media. Concerns were raised during a consultation period in the UK on its rule amendments that the changes will merely add to auditors’ already extensive “box-ticking” requirements.
The planned updated Irish rules will carry paragraphs emphasising “the importance of remaining alert for conditions that indicate a record or document may not be authentic” and requirement that require that “in addition to investigating inconsistent responses to inquiries of management, those charged with governance or others in the entity, the auditor shall also investigate responses that appear implausible”.
They also lay out how audit teams need to discuss various fraud risks when looking into a company’s finances, make inquiries about whether employees or other parties had raised concerns about potential fraud, and emphasise that auditors of public interest and listed entities must explain when forming an opinion on financial accounts “to what extent the audit was considered capable of detecting irregularities, including fraud”.
Iaasa has set a deadline of close of business on September 3rd for interested parties to make submissions on the planned changes.
While the International Auditing and Assurance Standards Board issued a discussion paper last September on fraud and going concern in audits, Iaasa said it was likely that it would take “several years” before there are any changes to the international auditing standards resulting from that process. “We will monitor developments in this area to ensure that the Irish auditing framework continues to reflect international best practice,” it said.