The role of auditors in protecting against bank fraud

In the concluding part of their article Margaret Stewart and John Dunn of the University of Strathclyde consider auditors’ responsibilities in relation to fraud-reporting and the provisions of the Banking Act 1987 that pertain to the bank auditor’s duties during the statutory audit.

The article first appeared as a chapter in Banks, Fraud and Crime (2nd edition), edited by Joseph J. Norton and George A. Walker, published by LLP Professional Publishing 2000. It is based on the original chapter by Ken McCuirefrom the first edition.

To whom should auditors report a suspected fraud?

The Auditing Practices Board’s standard [Statement of Auditing Standards 110, “Fraud and Error”], requires auditors who come across a suspected fraud to report the matter to the appropriate level of management. If the auditor suspects a member of management, then the report should be addressed to the audit committee, typically a subcommittee of the board, comprising mainly non-executive directors, or to the main board. This guidance is clear and unequivocal. Unfortunately it is rather less clear-cut in the situation where the auditor suspects that members of the board are themselves involved in the fraud. The reasons for the reluctance to report management fraud, the auditor’s duty of confidence and the risk of an action for defamation, have already been referred to above (see part one of the article, Fraud Intelligence March 2001).