The UK’s accounting regulator has proposed increasing the requirements on auditors to detect fraud in company accounts following a spate of high-profile accounting scandals.
The Financial Reporting Council (FRC) has launched a review into the international accounting standard outlining auditors’ responsibilities to identify fraud.
The watchdog is proposing revisions to the standard to provide “increased clarity as to the auditors obligations” on fraud, as well as bolstering the requirements for auditors to identify “risk of material misstatement due to fraud and the procedures to respond to those risks”.
The collapse of Patisserie Valerie last year sparked a debate within the accountancy industry on whether auditors were responsible for looking for fraud in company accounts.
The cafe chain collapsed into administration following allegations of “significant fraud” at the company and a £95m black hole in its finances. The chief executive of Grant Thornton, Patisserie Valerie’s auditor, has said it was not his firm’s responsibility to look for fraud in the chain’s accounts.
“The UK needs to show leadership and move in advance of international standards to address urgent stakeholder concerns in the public interest,” said FRC executive director Mark Babington.
“We believe that some of the misunderstandings that have been communicated around the auditor’s responsibilities in respect of fraud meet this test,” he added.
The FRC’s consultation on the new proposals will run until 21 January 2021.
Meanwhile the watchdog called on firms to ensure their reports and accounts remain clear, consistent and relevant amid the increased economic uncertainty triggered by the coronavirus pandemic.
In its annual review of corporate reporting, published this morning, the FRC said it had reviewed 216 accounts in the past year, and had written to 96 firms with “substantive questions” about their reports.
Some 14 companies were required to restate their accounts “in instances where significant non-compliance occurred”.
The FRC said it would focus on disclosures on risk, judgement and uncertainty in the face of the economic impact of Covid-19, Brexit, and climate change in its upcoming monitoring of annual reports.
“Companies have a key responsibility to prepare high quality annual reports to ensure investors, shareholders and other users can make timely and informed decisions,” said FRC executive director David Rule.
“Given the heightened need for high-quality disclosures as a result of the Covid-19 pandemic, it is vital companies carefully consider the FRC’s findings ahead of the next reporting cycle.”