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The architect of proposed sweeping reforms to the UK audit profession has called on the government to accelerate an overhaul of the sector in the wake of the Wirecard scandal, in which a Big Four accounting firm failed to uncover a €1.9bn fraud for several years.
“We must not wait until there is a market failure, there has to be a whole mindset change on what is the purpose of an audit,” said Donald Brydon, former chair of the London Stock Exchange, who was commissioned by the government to review the audit market last year. “Another couple of big scandals and suddenly you have a global audit profession that is entirely in disarray because choices become more limited or there are knee-jerk reactions.”
EY, which had audited Wirecard since 2009, is facing lawsuits by investors and a regulatory investigation over its failure to uncover fraudulent bank balances and transactions at the German payments company, which at its peak was worth €24bn. Wirecard filed for insolvency last week and its chief executive has been arrested and released on bail. EY failed to conduct routine audit procedures to verify Wirecard’s bank balances, which could have uncovered the fraud, for at least three years.
The accounting firm said that “third parties, with a deliberate aim to deceive, provided EY with false documentation” during its most recent audit of Wirecard’s financial statements. Mr Brydon said: “Given the focus on Wirecard, making it clear that auditors have an obligation to find fraud rather than stumble over it would be a smart move to change auditor behaviour.”
His report into the UK audit profession, which was handed to the Department for Business, Energy and Industrial Strategy in December, proposed that accounting standards were overhauled to include a requirement for auditors to “endeavour to detect material fraud in all reasonable ways”. Currently auditors are obliged only to confirm that company financial statements are free from material misstatements “whether caused by fraud or error”. Mr Brydon also proposed that auditors should be taught forensic accounting methods and “fraud awareness”....