ABSTRACT
5.1 The precise nature and extent of the auditor’s 1 responsibilities in relation to fraud have been the subject of much debate in recent years. The clarification of the auditor’s duties in this area was regarded as a priority in the late 1970s when the accountancy profession first created a standard setting body for the development of codified auditing standards. 2 The Institute of Chartered Accountants in England and Wales subsequently commissioned two reports on the matter. 3 The auditor’s alleged inability to detect fraud is one of the principal elements of the “expectations gap” between public and professional perceptions of auditors’ responsibilities. 4 The debate has been fuelled by the collapse of a number of corporations, for example British and Commonwealth Holdings, Polly Peck and Maxwell Communications, especially after the institutions had received a “clean bill of health” from their auditors. Post facto investigations into these collapses have invariably, and with a sense of inevitability, revealed the existence of widespread systemic fraud and, not surprisingly, have prompted commentators to ask, “what were the auditors doing?” 5 In relation to banks in particular, concern over the audit function has been aroused by the spectacular fall from grace of the, by now notorious, Bank of Credit and Commerce International (BCCI). The Bank of England (formerly the institution with statutory responsibility for banking supervision in the UK) took the decision to close the UK operations of BCCI on 5 July 1991 after it was presented with irrefutable evidence of widespread and serious fraud within BCCI. Evidence of impropriety and wrongdoing at BCCI only came to light as a result of specific investigations into its affairs ordered by the Bank of England and was not brought to light by the normal audit process. The failure of BCCI’s auditors to reveal one of the biggest bank frauds in history has raised the fundamental question: what are the bank auditor’s responsibilities in relation to fraud? This chapter will attempt to provide an answer to that question.
