On Wednesday the audit profession was doing what it does best – protecting its remarkably privileged position from even the most modest of challenges.
While growing numbers of investors are questioning the usefulness of audited financial statements, the tone-deaf auditors participating in a parliamentary hearing were pushing back against proposals that will do little more than add a few muscles to a generally weak regulatory system.
The occasion was the Parliamentary Finance Committee’s hearing on proposed amendments to the Auditing Profession Act, designed to beef up the powers of the Independent Regulatory Board for Auditors (Irba).
The most significant proposals would give Irba the power – after securing a warrant from a court – to search and seize documents in the course of an investigation.
The amendments also include a plan to strengthen Irba’s capacity to undertake investigations by creating a large pool of experts to draw on when disciplinary committees are required.
The background to the proposed amendments has been a slew of corporate scandals stretching across both the private and public sectors, and the glacial pace at which Irba has appeared to respond.
In only one case has Irba acted with commendable speed. In March 2019 former KPMG partner Jacques Wessels was struck off the country’s register of auditors after admitting to six charges of misconduct relating to the 2014 audit of Linkway’s financial statements.
Wessels was only the third auditor to be struck off the register since 2016 – a five-year period characterised by high-profile multi-billion rand corporate scandals and devastating state capture.
Perhaps more typical however is the extremely expensive five-year investigation into the auditors involved in the collapse of African Bank. Deloitte is facing 10 charges with a possible maximum fine of R200 000 per charge. Irba’s deliberations have been finalised but its decision is still under wraps.
This is just one of the issues Open Secrets wants addressed.
The advocacy group, which earlier this year published a devastating and comprehensive account of the role of auditors in state capture and corporate collapses, wants to see much more transparency in Irba’s handling of rogue auditors.
And it wants to see steeper fines, in line with the wealth of the large audit firms.
“At present fines can easily be absorbed as a cost of doing business,” says Open Secrets’ Michael Marchant, one of the authors of The Corporations and Economic Crime Report.
Regulator must regulate
Former Irba CEO Bernard Agulhas tells Moneyweb that the regulator’s powers and resources made it extremely difficult to effect speedy resolution of any controversial matter.
“The members of our disciplinary committee were all part-timers with full-time jobs in the legal or auditing profession; coordinating their diaries for an investigation was extremely challenging, particularly if one of the members was attached to a firm being investigated.”
Agulhas, who was the first CEO to treat Irba as a regulator and not an accommodating industry facilitator, believes the proposed amendments will go some way to shoring up the public’s faith in auditors.
Lawyers hinder rather than help
He is particularly keen to see lawyers play a less prominent role in the investigation process, a fact, he says, that has contributed to investigations being dragged on for years.
“Auditing is a technical function and non-compliance can be proved reasonably easily by technical experts but lawyers are brought in and are able, eventually, to prove that legally there was no non-compliance.”
Agulhas says this may have helped to secure short-term victories for auditors but that it is at a potentially huge cost to the industry as it undermines public trust.
One corporate lawyer, who has tracked high profile scandals including Steinhoff, VBS Bank, Tongaat and African Bank, says the audit profession should be increasingly worried about working itself out of a role in the corporate world.
“They have walked away from every scandal claiming it was not their responsibility. This must raise the issue of the value of audited accounts.”
In theory the function of an audit is to verify whether the financial statements represent the financial position of that company and whether the statements have been properly prepared.
Duty to report
Auditors also have a duty to report ‘irregularities’ such as bribery, fraud or corruption to Irba. There is no evidence in any of the corporate scandals that have destroyed billions of rands of investors’ money, or in any instance of state capture, of auditors fulfilling either function or duty.
The lawyer says it might not be too long before shareholders of listed companies are asked to vote on whether or not they want their financial statements audited.
As things stand that would require a change to the Companies Act, which currently obliges companies – above a certain size – to have their financial statements audited.
The lawyer acknowledges that auditors can play a valuable role, but says increasingly they don’t.
As for any sort of social role, he points out this has been totally undermined by their own legal arguments. In July the Supreme Court of Appeal highlighted the limited scale of the auditor’s role in its ruling in the so-called African Bank case in which shareholders were trying to hold auditors and directors responsible for the multi-billion rand losses suffered as a result of the 2014 collapse of the bank.
According to Henochsberg: “The (African bank) ruling makes clear that the auditor does not act for, or in, the public interest.” The auditor acts only for its client, the company.
According to the ruling, auditors are accountable to shareholders collectively as a body; in other words, as the company but not on an individual basis.
“Put differently, when auditors make negligent misstatements concerning the company’s financial statements, individual shareholders do not have claims against the auditors, because financial statements are not prepared for the benefit of shareholders’ individual investment decisions. Instead, the primary purpose of auditing accounts is to report on the stewardship of the directors to the shareholders as a body, in order to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided.”
In South Africa, boards have tended to use the failure of auditors to justify their own failures.
If auditors sign off on flawed financial statements year after year, how could directors have been expected to pick up the problems, ask increasing numbers of well-paid non-executive directors.
The proposed amendments currently before Parliament might help to shore up public trust.
Or it might be too little too late.