Two new accounting standards look like a favourable occasion for joint partnerships between solicitors and auditors but, in reality, they provide opportunities for those firms of lawyers which have accountants or companies as clients.

In this respect the headings of the statements of accounting standards (SAS) 110 and 120, 'Fraud and error' and 'Consideration of law and regulations', are themselves a hint of what is to come.

They are an attempt by the Auditing Practices Board (APB) to deal with what it regards as the expectation gap between what the general public perceives as the auditors' function and what they can actually achieve.SAS 110 is therefore a reminder to auditors that their audit procedures must recognise 'that fraud or error may materially affect the financial statements' (SAS 110.1).

In the accompanying commentary directors are reminded that they have re sponsibilities too.

As part of their duty to prevent and detect fraud or error in larger companies they may well have to set up an internal audit function, a legal department, a compliance office and an audit committee.In all this the auditors' job is not to prevent fraud and error, which is difficult when modern technology makes it so much easier to provide false evidence and documents.

The accountants instead must assess the risk of it happening and take appropriate steps.

To guide them an appendix to the standard gives examples of various conditions or events which might increase the risk of fraud or error.

They include a management dominated by one person with no effective oversight board or committee.There have been some instances of this in recent financial scandals, but SAS 110 goes a little bit further by setting guidelines of what the auditors must do if they find actual fraud.

In extreme cases where the integrity of the directors is in doubt, a report should be made in the public interest to the proper authorities.All this is good common sense, but SAS 120 linked to SAS 110 is more controversial.

The auditors have to recognise that the non-compliance by companies of certain laws could affect the financial statements.

At a recent press briefing to introduce the new regulations, Richard Fleck, a partner of accountants Herbert Smith, gave as an extreme example the factory which pollutes the atmosphere.

The plant may have to be closed down, and the company may be prosecuted or sued.

Any one of these could have a serious effect on the business.Although auditors are not expected to prevent non-compliance with laws and regulations, they must perform procedures 'to help identify possible or actual non-compliance' (SAS 120.3).

To achieve this they will have to gain 'a general understanding' of the law and regulations applicable to the industry and thereby to their client company.

They will have to inspect the correspondence with any licensing authorities and to obtain written confirmation from the directors that everything, such as events of possible non-compliance, has been disclosed to the audit team.The auditors will have various options should they find anything untoward.

At the simplest level a problem should be discussed with the company's management (SAS 120.6), but where there is a statutory duty to report to the authorities, that must be done without delay (SAS 120.12).

The audit report annexed to the annual financial statements may be qualified.Although the auditors have some influence, the directors have the prime responsibility for ensuring that the company complies with the law and any regulations.

The notes in SAS 120 suggest that they should keep a register of 'significant' laws affecting the particular industry.

Among other tasks they should ensure adequate internal controls, the training of employees, the keeping of records of complaints, the monitoring of legal requirements and, of course, the engaging of legal advisers to assist in that monitoring.Large companies and large firms of auditors will have in-house lawyers, who should have already set up these procedures.

Mr Fleck went further at the press briefing by commenting that most audit firms already complied with the new regulations.

He also contradicted himself by saying that the standards would make 'a substantial difference'; they contained 'brand new stuff'.

APB chairman Ian Plaistowe added: 'We expect auditors to take a positive role in seeking material fraud or non-compliance.'These statements are a long way from the bland pronouncements in the regulations that it is not the auditors' duty to prevent fraud or non-compliance, but both accountants and companies have to review procedures and systems.

They will not have long, because the new standards come into force from 1 July 1995.They are good news for those solicitors whose clients include small and medium-sized audit firms with few or no in-house lawyers.

The accountants, for example, will have to review the industries of their clients, and could well need guidance and information about the laws affecting particular industries.Even small and medium-sized businesses should know the relevant laws affecting them, but they may not be structured sufficiently well to meet the new audit requirements.

Solicitors to such enterprises will be ideally placed to help set up procedures, and perhaps provide a monitoring service.It is perhaps just as well that very small enterprises no longer have to be audited, because no doubt the costs will go up.

The APB has pointed out that there could well be savings, in that companies will have better procedures to comply with the law and to combat fraud.

On the other hand, business life is now so complicated the audit team of accountants should perhaps now include a solicitor.