Auditor's Consideration of Noncompliance with Laws and Regulations

(Updated Oct. 1, 2018)

Objective


Explore whether there is a need for improvements to existing standards to provide better direction to auditors about their responsibilities with respect to possible illegal acts. 

Background


AS 2405, Illegal Acts by Clients, establishes requirements regarding the auditor's consideration of possible illegal acts by a client in an audit of financial statements. The standard has remained largely unchanged since its issuance in 1988. In recent years, regulators and investors have focused significant attention on high profile cases involving violations by companies of laws and regulations that relate primarily to their operations, rather than to their financial accounting and reporting. Such violations include, for example, bribery prohibited by the Foreign Corrupt Practices Act of 1977, and violations of environmental laws and consumer fraud and banking regulations. These illegal acts may not have an immediate and direct effect on a company's financial statements, but often have indirect effects, such as significant fines and penalties and reputational damage to the company. Staff considerations include auditors' responsibilities related to illegal acts under existing auditing standards and the federal securities laws, as well as the requirements of other standard setters and regulators. Staff considerations also include current practices for auditors' detection, investigation, and reporting of illegal acts by reviewing, among other things, academic literature and other studies, and firm methodologies, and analyzing PCAOB and SEC oversight activities. Other considerations include input from meetings with the IAG and SAG and additional outreach to various stakeholders.

Status


The staff is summarizing its research findings and developing recommendations for next steps for Board consideration.