2 March 2021: One response to a recent IAASB discussion paper has taken aim at the premise of the consultation and called for its withdrawal – but under good standard-setting practice would this be an appropriate response?

The IAASB has received 84 responses to its discussion paper on the expectation gap between public perception and the auditor’s responsibilities when it comes to fraud and going concern. These have come from various organisations, including ICAEW. The vast majority offer detailed, perhaps predictable comments, but among the responses on the IAASB’s website, one stands out.

The Pensions & Investment Research Consultants (PIRC) sent a strongly worded response. It insisted that the premise of the consultation is incorrect; there is no expectation gap under the law of many countries, including the UK.

More surprisingly, it also requested that the discussion paper be withdrawn by 21 February. “We will also be asking accounting firms in the UK and the FRC to repudiate it. The situation is so serious that PIRC is minded to recommend that shareholders vote against any accounting firm that does not publicly repudiate the assertions in this document by 28/2/21, as audits conducted on that basis would be in breach of duties and contract,” the PIRC response stated.

The expectation gap and the law

The central premise of the PIRC letter is sound; no legal case would quote the audit expectation gap. In any audit file review undertaken by a regulator, what’s important is the extent to which standards and other applicable requirements have been complied with. And while there certainly is an expectation gap between auditor requirements under the law and public expectations, shouldn’t the focus of IAASB be on improving the prevention and detection of fraud and reporting going concern, rather than dwelling on the exact nature of the expectation gap?

However, if a global audit or accounting discussion paper is flawed, is withdrawing it an appropriate response? It would be unprecedented and lacks logic, given that the whole purpose of a discussion paper is to look at different options. The discussion paper was issued in accordance with recognised good standard-setting practice globally, as a means of soliciting comments from any parties who wish to comment - as the PIRC did.

Public repudiation

It would also be unprecedented for firms to be expected to publicly repudiate the paper. There are no changes to standards outlined in the paper – it’s a discussion paper. The call for repudiation seems unwarranted. If the PIRC aims to avoid changes to auditing standards, wouldn’t it be better to engage with IAASB? 

The purpose of the paper

Any IAASB proposals for changes to international standards as a result of the responses to the discussion paper would likely take effect after several years, given the timescales of global standard-setting. The UK regulator would then consult publicly before any new or amended auditing standards were accepted for use in the UK, and after any adaptation deemed appropriate. So nothing in the discussion papers seems likely to impact the conduct of audits in the UK in 2021/22. 

The IAASB’s auditing standards specifically acknowledge that they do not override law, regulation or contractual obligations in the jurisdictions in which they are adopted. Ultimately, in the UK and other jurisdictions, it is for the courts to determine the extent of auditors’ responsibilities.