Global audit body proposes stricter fraud-catching role

How sleuthy should auditors be when they’re poring over a company’s financial statements?

Wading into the debate last week, the International Auditing and Assurance Standards Board gave its suggestion: significantly more sleuthy.

The form that answer took was its proposal for a new standard on The Auditor’s Responsibilities Relating to Fraud In an Audit of Financial Statements. (Not exactly flashy, but as headline writers ourselves, we admire the clarity.)

While leaving the main responsibility to stop fraud with a company’s management and governance, the new standard “focuses on the key role that auditors play,” IAASB chair Tom Seidenstein said in a statement announcing the 162-page proposal.

On the off chance you don’t want to read each of those pages, the board distilled them into seven high-level changes that redefine what it says auditors should do to prevent fraud and how they’re expected to do it—including doing the job with a sense of “professional skepticism.” If that seems a little too vibe-y, the proposal also gets into definitions such as what should be considered material in an audit. The draft mentions that misstatements can be made not just with fudged “quantitative material” but with “qualitative” deception such as omitting important disclosures.

The board hopes to approve the standard in March 2025 but it wouldn’t take effect for at least another 18 months, according to the proposal. It is seeking comments by June 5.

New role, who dis? That leaves plenty of time for debate on the role of financial statement auditors, which has come under increasing scrutiny over the last decade due to high-profile failures to spot fraud—most notably at Wirecard, the German payment processor that was dissolved in 2020 after auditors were unable to find a “missing” €1.9 billion ($1.99 billion) in its accounts.

Regulators and professional groups have been feeling the pressure to act, and last June, the Public Audit Oversight Board (PCAOB) proposed a new standard for detecting fraud that would require auditors to “proactively identify...laws and regulations” that a company must obey—and to sound the alarm when it appears to break them.

Then the PCAOB got it from the other side. Industry groups led by the Chamber of Commerce let the board know that they were not fans of the new proposal. Their open letter said the standard would force auditors “to do the combined work of lawyers, management, and regulatory and law enforcement authorities.”

Seidenstein seemed to have that talking point on his mind when introducing the IAASB proposal. “While auditors are not policemen,” he said in a statement, “they can and must play a role in identifying and responding to material misstatements.”

Amanda “Jo” Erven, an internal audit consultant and director of internal audit education at the Metropolitan State University of Denver, told Retail Brew she supports stronger anti-fraud standards across the field. “This is a great step,” she said. “I wish it could go further.”

That said, she understands why external auditors might be wary of the proposal. “Fraud is the ‘F-word,’” she said, adding whether it’s management or internal or external auditors, “nobody wants the responsibility to catch it.”