Fraud is often an illegal act

In 2019 the High Court and the BEIS Parliamentary Select Committee debunked the myth that the public expected more of auditors in respect of dealing with fraud and going concern than is required of auditors.
Some large auditors for many years have described this as the ’expectations gap’. However, from the High Court case, rather than the public expecting too much, the legal expectations might make people’s hair stand on end. Because of failing to find a management fraud the Court held that the auditor Grant Thornton was accountable for the financial consequences of the company trading unlawfully with defective accounts. The damages included dividends paid as well as the amounts that had been mis-invested in the failing business that wouldn’t had the accounts been audited properly.
The Parliamentary Committee said that rather than an expectations gap the auditors were underselling their duties and there was a delivery gap.
Surprisingly, or not, the accounting profession controlled International Accounting and Assurance Standards Board, which sets auditing standards recently issued a consultation which rather than dealing with the delivery gap and attempts to fight the battle already lost and consults as if the expectations gap exists. The IAASB even makes up a new construct it calls the ’evolution gap’.
PIRC has written to the IAASB asking them to withdraw the misleading consultation and written to the largest accounting firms requesting that they refute it. The pertinent issue being living up to the expectations of the law, not lobbying to undermine it.
From looking at responses to the consultations from the largest firms the response from BDO shines above the rest, and point out problems with auditing standards as well as accounting standards. The Basle Banking Committee too has spotted that some of the ’expectations gap’ has been planted
into the auditing standards by weasel wording, basically by conflating potential difficulty in finding it with the duty to look for it.
Some of the statements in the responses are remarkable, one of the Big 4 firms says ’fraud often constitutes an illegal act’. We struggle to understand when fraud isn’t unlawful.
PIRC awaits replies from the auditing firms to determine which ones merit votes for their reappointment at AGMs this year.

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