An extraordinary war of words has broken out between Pensions & Investment Research Consultants (PIRC) and the International Auditing and Assurance Standards Board (IAASB) over the audit standard setter’s recent consultation on how auditors handle concerns about fraud and going concern.

In a sharply worded comment letter on the proposals, PIRC chair Alan MacDougall said PIRC was “minded to recommend that shareholders vote against any accounting firm that does not publicly repudiate the assertions in this document”.

He added that any “audits conducted on that basis would be in breach of duties and contract.”

Sparking the row is a discussion paper from the IAASB, an international audit standard-setting body based in New York, in which reference is made to the so-called expectation gap in auditing.

In contrast to the International Accounting Standards Board (IASB), which sets accounting rules for preparers of accounts, the IAASB is responsible for the rules that auditors must follow when auditing financial information.

The IAASB said the purpose of its consultation is to gather views from stakeholders about the role of auditors in relation to fraud and going concern during the audit of financial statements and to find out if the IAASB’s standard on the two issues are still fit for purpose.

This feedback, the IAASB said, could inform its future standard-setting activities.

The consultation comes as the audit profession in the UK comes under heavy fire from politicians following a number of high-profile corporate failures such as services firm Carillion.

In April 2019, the UK Parliament’s Business, Energy and Industrial Strategy Select Committee delivered a damning report on the shape of the audit situation.

The committee concluded that: “The high proportion of sub-standard audits and the continued domination of the Big Four together demonstrate that these reforms have proved totally ineffective in increasing competition and delivering acceptable quality of audits.”

The report was also clear that “the detection of fraud should be a priority within an audit and audits must demonstrate how potential fraud has been investigated.”

“The detection of fraud should be a priority within an audit and audits must demonstrate how potential fraud has been investigated”

The IAASB told IPE in a statement: “As the UK parliamentary inquiry notes, auditors have substantial obligations in relation to detecting fraud in an audit, regardless of the expectation gap.

“Under the International Standards on Auditing, auditors are already required to identify and assess risks of material misstatement that arise either because of fraud or error and to undertake audit procedures that are targeted at identifying those that could lead to a material misstatement in the financial statements.”

It added that the IAASB’s consultation “is aimed at whether we should strengthen, not reduce, these existing obligations.

It further noted tha the term “expectation gap” in the consultation is meant as a starting point to facilitate comment from many perspectives “to help us make informed decisions on possible enhancements. In this manner, we will base any targeted action upon a common understanding of what people want and expect of auditors in relation to fraud”.

However, Alan MacDougall, PIRC’s founder and managing director added: “Given that the IAASB is now recognising the substantial obligations auditors have from the parliamentary inquiry, PIRC would expect to see a revised consultation.”

He said “the starting point for the common understanding the IAASB seeks should be on an informed legal position, not one based on the myth of a so-called ’expectations gap,” adding that “if the public is wrong on expectations of auditors, it is more likely to be that they under appreciate their legal duties given the extent of misinformation over the years”.

In the meantime, he said, “we expect the large accounting firms to repudiate the reference in the consultation to an expectations gap. Indeed it will be interesting to compare their responses to the consultation with what the IAASB has now said”.

The government is expected to unveil a consultation on long-awaited proposals to shake up audit and UK corporate governance imminently.

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