Greed remains at the heart of audit scandals

‘Irba firmly believes that auditors are not sufficiently independent and are driven by lust for money.’
South African audit firms under scrutiny for the wrong reasons. Picture: Shutterstock

The rot in the auditing and accounting profession was laid bare during a recent round table discussion between regulators, industry bodies and Corruption Watch.

The root cause of the problems has been attributed to “pure greed and corruption”. Industry players warned that blaming “systemic problems” alone will not solve the problems. People need to be held accountable.

South African firms such as professional services company KPMG, law firm Hogan Lovells and the international management consulting firm McKinsey have been embroiled in one “state capture” scandal after another. It has revealed shortcomings in the South African regulatory and oversight models, and has led to a number of investigations that will likely result in significant interventions by government.

The South African Institute of Business Accountants (Saiba) organised the round table to explore the state of the profession, what led to the current crises and likely outcomes from the fallout.

David Lewis, executive director of Corruption Watch, said the current crises cannot be attributed to a few errant auditors and accountants.         

“When a firm has to fire eight members of its executive team to clean up the company, you do not have a bad apple problem. You have a bad barrel problem.” He is not surprised at what has happened in the profession.

“The corruption landscape for the past decade has been dominated by a bunch of business people who are not really business people. They are in fact hoodlums or criminals who hitched up with criminals in government. The outcome was that they reaped a considerable amount of public resources.”

Lewis said when proceeds of that scale have to be hidden, you need the help of auditing firms, managing consultants and even lawyers. “The reform focus is now directed at these principle facilitators of grand scale corruption.”

Rory Voller, commissioner of the Companies and Intellectual Property Commission, said that while people were looking at possible “systemic issues”, which affects the assurance model, the crises should be seen for what it really is: pure greed.

It is about “chasing fees” not only in the auditing profession but also in the legal profession. “It all starts with directors getting too close to the assurance watchdogs … we need to have better oversight and we need to hold people accountable.”

The auditing profession’s watchdog – the Independent Regulating Board for Auditors (Irba) – firmly believes that auditors are not sufficiently independent and are driven by lust for money. “Professionalism has been taken over by commercialism. Partners at the firms are measured on the revenue they generate and the clients they attract to the firm,” said Bernard Agulhas, CEO of Irba.

In the process, they take on clients they were not supposed to have taken on in the first instance. Changing incentive models at auditing firms may start making a difference. Lewis said that instead of being the watchdogs of business, auditors and accountants are business people in their own right. “Their suits are as sharp, their headquarters as opulent and their salaries as large.”

It used to be the profession that held powerful people and powerful institutions accountable. “They are now simply businessmen. The profession has become indistinguishable from the businesses whom they audit.”

Agulhas has called for mandatory audit firm rotation to address concerns around independence. When auditors know a fresh pair of eyes will be looking at their work, they will be less keen to try to hide things. The possibility that the Big Four may become the Big Three if KPMG does not weather the storm has raised questions about capacity in the market and the impact on large businesses.

Agulhas believes it will actually address concentration in the market. “We have 2 000 audit firms in South Africa, not four and there are 4 500 auditors, not eight.” When companies say some auditors do not have sufficient experience, we say they will never get it if they are not given the opportunities, Agulhas said.

Saiba CEO Nicolaas van Wyk said it was critical to take a long and hard look at the profession because smaller firms were struggling to break into the market. “Access is not equal in many ways.” He commented on the millions government is spending on consulting work, however very few smaller firms get a slice of the work.

Fanisa Lamola, acting CEO of the South African Institute of Chartered Accountants (Saica), said the institute is doing research, in collaboration with a local university and an international partner, on the potential outcome and impact if auditing and advisory services were split.

“Saica is of the opinion that it could be a solution, but the institute does not want to come up with a quick solution only because we are fighting a fire right now,” she said.

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You hit the nail on the head; greed is the problem. With the depressed market; firms are chasing the pie that is getting smaller. KPMG is not the only company chasing untenable targets. Most JSE listed firms are in the same boat.

On carte-blanche we saw how GLENCOR (in Oggies) are blasting dynamite next to residential areas; causing houses to crack; yet they deny deny deny.

‘’ Fish rots from the head down’’

Methinks, KPMG must by now know that they have been publicly humiliated, dumped by big corporate clients, very close to being stripped of their professional status and being sued as co-conspirators of fraud!

They should also remember that they got ‘’paid’’ a lot of money (R 66 million) as auditors and ‘’advisers’’ at JCI and Randgold. Their greed for fees methinks was at the cost of a defenceless and emasculated audit client, Randgold.

But, to date KPMG only provided an ‘’Independent Auditors Report “stating that the ‘’Group Financial Statements’ ‘has been prepared in accordance with ‘’the basis of preparation’’, a meaningless phrase! It was NOT prepared according to IFRS and the Companies Act.
There seems to be a plethora of reasons (as reporeted in mainstream media) why Investec had to protect JCI from being pushed into bankruptcy, but methinks the main reason was JCI’s ‘’so-called’’ (Western Areas) toxic AU hedge-book. The Benoni boytjie had to protect Investec’s massive asset and knew that it was only possible as long as Western Areas and JCI, its controlling shareholder. Were kept out of insolvency!

Greed, proven by history, is the cornerstone of human uplifting. Especial ones stuck in stone age mode called tribal. War is the name of the most important greed tool. Read human history from day zero to this. Translated, from arrow to nuclear. Only made possible by greed.
Without that instinct, swinging from tree to tree,eating, mating, life will be paradise, for some. Remembering Woodstock. The feeble attempt of humans thinking all blessings, food to, comes from heaven.
Most of admirers did fall victim to greed to. The human end is unknown. Greed have no limits. Other planets, flashing the correct sign, we go for it. Greed will the engine.

I see you are a proponent of the Gordon Gecko’s – Greed is Good – speech, but when it comes the greed I think I’ll hitch my cart to WB – be fearful when others are greedy etc…

To bobby23: Who or what is WB? Why not write it out? We can then all appreciate your insights.

Well done and Voller and Aghulas hit the nail on the head. Call corruption what it is and not “state capture.” Greed and corruption and chasing money. Destroying our society.

Corporate professional fees of the big 4 are obscene, more than brain surgery of doctors who save lives. Seriously R4,000- R6,000 per hour. They always counter with “the risk we take” argument but conveniently every assignment is covered by a 2x liability fee. So if shareholders suffer billions like Steinhoff, the auditors can only be sued for twice the audit fees which is nothing. And all 4 do it.

Yes. That is how they protect themselves. Fine them, name and shame. This is mostly the partners of these firm. They get the money for the risk they take. Anyway if they were reckless in their audit they should be held accountable just as the directors of the companies should be.The liability should only be limited if they did their best to avoid these instances.

I find it astounding that IRBA can make such a statement about essentially its own members. I am a CA but not in practice so not part of IRBA but I would have been very upset about such a statement had SAICA made it for instance.

Agulhas is also being obtuse when he says there are 2000 audit firms in SA not 4. How many of those firms have the capacity to take on the audit of of a top 100 listed JSE firm? 10? Capacity to do a complex audit like that of a bank/insurance business? 4.

Would like it if auditors in prcatice would correct me but you probably need 50 arrticle clerks/audit managers for the audit of a bank and they would probably spend 3/4 months on that audit. Joe Soap Incorporated with two article clerks, straight from school, cannot do this audit, full stop.

SAIBA, that organised the event, obviously wants to benefit from the bad press CA’s are getting, asking why its members do not get audits, knowing full well that its members do not have the technical expertise required for complicated audits. It is similar to asking why a dentist is not doing heart transplants!

It’s true that greed is the problem. However, I see greed even as the main corruption driver in smaller auditing firms as well. It doesn’t help anybody if we keep hearing the story that it’s only a few bad apples. Every year it’s only a few bad apples and in many cases these incidents are not even reported to IRBA or any of the other authorities. We even found that micro auditing firms turn a blind eye just to retain the account and earn the fee. We are, therefore, way past what can be regarded as immaterial, a word some individuals seem to favour the moment the profession gets a side slap. I studied the issue of First Strut in detail. The CEO was a CA until his lover shot him. An amount of R2bn disappeared over a period of some 20 years they say. Taking into account the professional qualifications of most if not all of the risk officers of all the major banks that lend this company this type of money, a few bad apples is not really a term that comes to mind. Let me know if I need to give more examples. Believe me there is quite a lot. A solution? Yes there is one. The first matter to be addressed is that the government needs to allow more smaller firms with access to government work. Secondly, it’s time that the two dominant South African accounting firms be allowed to register with IRBA. If the one falls short on perceived theoretical knowledge a stream should be developed where these individuals can be upgraded instead of forcing them to redo a whole degree. All professional degrees are under constant renewal by the universities and the system should be changed where a person can even start off with a diploma and then progress to degree and then to an honours degree. There is no development path for people wishing to become statutory auditors but who lacks the cash resources to attend a full time B. Accounting degree from the very word go for various reasons. My plea is for easier access to everybody without dropping the standards. Even with the high education standards the profession is missing the mark by a few sea miles anyhow.

Really good comment.

The SAICA monopoly must be destroyed forever.

Suggest a competitions hearing to kickstart the process.

Name and shame for present and past (20years) office bearers.

There is a way you can get a CA(SA) without a Bcom Accounting Degree, but there is only one place that offers it and its UNISA. I’m on that path now, if you have a non-finance degree all you need to do is three one year courses then you are eligible to do your articles. Check it out…

So your solution to complex financial fraud is to get people with a lower level of education to do the job?

Obviously a lot of negativity against CA’s on these pages. Little green monsters – with failed board exams – everywhere.

I just know I would still much rather employ CA’s than somebody with only a finance degree. This comes from learning the hard way. Kid calculated PE’s using half-year earnings and he had a bloody honours in investment management! At least I know the fresh CA had to have half a brain to pass the boards

“………said Bernard Agulhas, CEO of Irba.”

LOL just where have you been the last 20 years dear Bern??

For crying out aloud this has been as plain as the nose on your face and anyone who has worked with these people. Criticisms of SAICA, CA(SA)s and auditors have been posted on these pages for yonks; often as comments to the nonsense your auditors CA(SA)s have been sprouting for far too long.

The reality is that the IRBA s/be immediately dissolved and all current office bearers banned for life from ever being such in any new organisation.

Pot/kettle/black.

Greed is morally repugnant, fraud and malfeasance on the other hand may constitute punishable crimes under the law. When is the government and FSB throwing the book to KPMG? Why are they still operating in the country when ample, more than ample, circumstantial evidence point to a mountain of wrong doing, against the very state entities the government is beholden to protect. Am I missing something here?

I have said it before, KPMG were the whipping boys…they got exposed…however the others are merely hiding below the parapet and are equally complicit as they were just as greedy, chasing the fee income…after all they also have an image to manage!

Ethics as a subject in Auditing is like the Hippocratic Oath in medicine…destined to be framed and collecting dust…

End of comments.

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