Should Auditors Uncover Fraud? For First Time, U.K. Says Yes

(Bloomberg) --

Should an auditor uncover fraud? Or is it the responsibility of directors and managers? That’s a question a government-commissioned report has grappled with as the U.K. attempts to move on from a litany of embarrassing corporate failures.

Overlapping and ambiguous legislation has ensured “there is both confusion and a gap between the reality and the expectations of performance of auditors in this area,” said Donald Brydon, the former Royal Mail Group Ltd. chairman who led the review. It’s the third government investigation in a year to look at regulatory oversight of audit.

On Wednesday, Brydon said for the first time that he wanted the incoming watchdog to make clear that auditors will be required to “endeavor to detect material fraud in all reasonable ways.”

Stung by a string of scandals at prominent British companies including failed government contractor Carillion Plc, authorities demanded reforms to roll back the dominance of the largest firms known as the Big Four -- Deloitte, KPMG, EY and PricewaterhouseCoopers. A tribunal is currently considering whether auditors at Deloitte were too cozy with senior management at British software firm Autonomy, in the run-up to one of the country’s largest ever corporate writedowns.

“I have found the question of fraud and auditors’ related responsibilities the most complex and most misunderstood,” Brydon said.

The Financial Reporting Council, which is soon to be abolished as industry watchdog, said Brydon’s suggestions would “have significant implications for the FRC in respect of our activities and resource requirements” should the government agree to implement the new rules.

On Tuesday, the FRC moved to cut down on conflicts of interest by strengthening its ethics standards. The changes will prohibit accounting firms from providing a number of advisory services to listed companies and financial institutions.

Brydon pointed out that criticisms have been leveled against auditors for more than 80 years. He finished his 138-page report with a poem from the 1930s: “And according to our figures the enterprise is wrecked / But subject to these comments, the balance sheet’s correct.”

To contact the reporter on this story: Jonathan Browning in London at jbrowning9@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Christopher Elser

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