Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

Want to save this page for later?

News

PCAOB Issues Guidance on Auditor Responsibilities to Detect and Report Illegal Acts

By:
Karen Sibayan
Published Date:
Nov 13, 2024

iStock-621844198 Audit

According to Accounting Today, the Public Company Accounting Oversight Board (PCAOB ) issued a new publication on Nov. 12 offering guidance from its staff on the auditor's responsibilities regarding detecting, evaluating and making communications on illegal acts. PCAOB's action happened as a "controversial" new standard that would make these requirements stricter are still in the approval stage.

The PCAOB staff conducted outreach related to the PCAOB's proposal to execute changes to the existing requirements. In June last year, Accounting Today reported that the PCAOB proposed replacing its existing standard, AS 2405, Illegal Acts by Clients, with AS 2405, A Company's Noncompliance with Laws and Regulations, and making some related amendments to other PCAOB auditing standards.

Accounting Today stated that the NOCLAR proposal was opposed by auditing firms and prompted a letter-writing campaign from the Center for Audit Quality and business groups going against the proposed changes that will make auditors more responsible for detecting and reporting signs of fraud and rule-breaking at the firms that they are auditing. Although the PCAOB has yet to vote on the proposed standard,  it believes the staff publication would assist in clarifying the existing requirements.

The PCAOB said that under federal securities laws, auditors have a responsibility to detect illegal acts, evaluate information that signals that an unlawful act has or may have happened, determine if it is probable that an unlawful act has happened, and, if so, to account for the potential impact of the illegal act on the firm's financial statements of the company while making the appropriate communications regarding illicit acts, unless “clearly inconsequential,” to management, the audit committee and possibly the Securities and Exchange Commission.

PCAOB standards have similar requirements. These responsibilities also influence the auditor’s obligation to plan and perform the audit to get reasonable assurance that the firm’s financial statements do not have a material misstatement due to error or fraud.

This staff publication makes auditors focus on relevant considerations when performing procedures to detect, evaluate, and make communications about illegal acts by a firm being audited.

In the publication, the PCAOB said that firms are subject to different legal and regulatory requirements relying on several factors, including geographic location, the product or services offered and the specific sector. Violations, by act or omission, of laws and regulations that a firm is subject to can significantly impact the financial statements and harm investors.

Auditors’ procedures for identifying potential illegal acts are crucial to planning and performing an audit. The PCAOB stated that federal securities laws prescribe the auditor’s responsibilities for considering the possibility of illegal acts by a firm and responding when an illicit potential act is detected. Audits must include “procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts."