Fraud and Going Concern: Do the Auditor’s Responsibilities Need to Evolve?

By Karen DeGiobbi, CPA, CA

Karen DeGiobbi, CPA, CA, is a Principal, Auditing and Assurance Standards, with the Canadian Auditing and Assurance Standards Board (AASB). She is leading the AASB’s recent activities and outreach around fraud, going concern and the expectation gap.

In today’s environment, challenged with the impact of COVID-19 and the global pandemic, attention to the topics of fraud and going concern when auditing financial statements has only increased.  This focus, however, is not new.  In the last several years, significant corporate failures have raised concerns globally over eroded trust in financial reporting. 

It is these company failures and fraud scandals that have drawn significant attention to the financial reporting ecosystem.  What are everyone’s responsibilities within that ecosystem and how does each party work together to address these concerns?

The role of the auditor in the financial ecosystem has notably seen significant attention. Much of it is rooted deeply in an ongoing challenge with an audit expectation gap between public perception of an auditor’s role and what the auditor actually does.

In September 2020, the International Auditing and Assurance Standards Board (IAASB) issued a discussion paper, Fraud and Going Concern in an Audit of Financial Statements. Its purpose is to gather views from all stakeholders on:

  • the role of the auditor in relation to fraud and going concern in a financial statement audit; and
  • whether their related standards remain fit-for-purpose in the current environment.

The Discussion Paper: A Bird’s Eye View

The IAASB includes a background discussion that highlights the roles of all parties within the financial reporting ecosystem.  It also analyzes the current financial landscape, including several large, recent global corporate failures. Multiple initiatives that have been undertaken across several jurisdictions are highlighted to explore the topic of the auditor’s role around fraud and going concern.  Notably, they include a report out of the United Kingdom by Sir Donald Brydon, which has garnered significant interest due to what some consider to be a radical view.  Also profiled is work undertaken in Canada by the Canadian Public Accountability Board, on their Fraud Thematic Review and Going Concern Project.

The IAASB defines and discusses the audit expectation gap before going into a detailed discussion of both fraud and going concern. The board asks for input on ways to help the profession evolve and includes several suggestions on possible enhancements that could be considered.

The Audit Expectation Gap

The audit expectation gap has been discussed at length for a number of years and, in general terms, is defined as the difference between what users expect from the auditor and the financial statement audit, and the reality of what an audit is. In 2019, the Association of Chartered Certified Accountants further broke down this gap to have three components:

  • The Knowledge Gap– The difference between what the public thinks auditors do and what auditors actually do.
  • The Performance Gap– Where auditors don’t do what auditing standards or regulations require due to the complexity of certain auditing standards or differences in interpretations.
  • The Evolution Gap– Areas of the audit where this is a need for evolution. 

The paper discusses possible solutions to address the evolution gap. Through our discussions many have, however, raised that the knowledge gap, while a main driver of the overall gap continues to be a challenge, with no clear path to narrow it.

Enhancements Proposed

The IAASB asks for input on any enhancements that could be considered in how the auditor’s role relating to fraud and going concern may need to evolve and the board has proposed a number of enhancements to foster discussion and gather input.

Some of the suggestions for fraud include:

  • Requiring forensic specialists to be involved more broadly on audit engagements– I have heard that one of the reasons that auditors struggle to identify the red flags of a fraud is that they have never seen one before. Perhaps this is where a forensic specialist can assist? Or would more widespread involvement only be surface level, limiting the benefits of their involvement while driving up costs? 
  • Requiring the auditor to have a suspicious mindset– It is clear that, when you talk to people about this suggestion, interpretations of what a “suspicious mindset” means varies significantly. Practitioners have also told me that the current concept of professional skepticism is already difficult to understand and apply. There is worry that adding another inconsistently understood concept will only complicate matters.

Some suggestions for going concern include:

  • Lengthening the time period for going concern assessments– Most people I have spoken to do not support this suggestion. As we find ourselves amid a global pandemic, where many can’t predict what will happen in two months’ time, most people I have spoken to can’t support the idea of extending the going concern assessment beyond 12 months.
  • Revisiting the concept of going concern– There has been strong support for exploring this area as the IAASB suggested. Many people have expressed the view that the concept of going concern is not widely understood and focuses too much on cash flows. One regulator I spoke with suggested it shouldn’t depend on whether or not you have enough cash to get through the next year but, rather, whether you can continue to run the business in the manner intended. 

Share Your Views!

The IAASB is asking for stakeholder responses by February 1, 2021. This project is in its early stages, which is the ideal time to share your perspectives to help influence its direction.  The Canadian Auditing and Assurance Standards Board will also be responding to the discussion paper. Aside from our formal stakeholder consultations, we have set up a community platform to gather stakeholder input. We want to hear what you think! Engage with us at and join the discussion.