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How to restore trust in the audit profession?

Wiseman Nkuhlu and others discuss the challenges.
When KPMG was accused of being complicit in state capture, the first reaction was disbelief. Image: Bloomberg

Professor Wiseman Nkuhlu recently delivered the keynote address at the centenary celebrations of the Faculty of Economic and Management Sciences at the University of Pretoria (UP). This was followed by a panel discussion during which some interesting points were raised.

Nkuhlu is Chancellor of the University of Pretoria, chair of the board of KPMG in South Africa, and a member of the Advisory board of the South African Institute of Chartered Accountants (Saica). He was the first black chartered accountant in South Africa, and over the next 40 years achieved many academic accolades and received many awards.

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In his book Enabler or Victim? KPMG SA and State Capture (KMM Review Publishing, September 2020) he discusses ethics, transparency, corporate accountability, and the role of chartered accountants in society.

Source: KMM Review Publishing

Called on to navigate KPMG through the crisis of being embroiled in state capture in 2018, he had to consider how KPMG could have ignored the information in the market, and find itself in a position that damaged its brand. When KPMG was accused of being complicit in state capture, the first reaction was disbelief. Thereafter, disbelief turned into denialism.

Nkuhlu says KPMG’s reaction took too long; someone should have stood up and said: “Not in the name of KPMG”.

Once appointed at KPMG, he insisted that each auditor’s commitment to integrity be reviewed.

In his book he discusses the desires that define our behaviours; and the desires that drive the behaviours of professional and business leaders. According to Nkuhlu, our egos drive self- interest. However, an understanding of our purpose in society should really drive our behaviours. Behaviours in turn influence decisions.

The profession in a nutshell

In trying to analyse what happened at KPMG, Nkuhlu reflects on the purpose of the audit profession, and that is of checking and verifying the financial statements of a company.

In reforming the audit profession, auditors should introduce risk management, and should not be swayed by commercial success and recognition by clients that they serve.

All professionals and business leaders should interrogate themselves and understand what really drives them, and what drives their conduct.

Nkuhlu is of the firm view that professionals and business leaders must aspire to a greater good.

He suggests that more audit firms should be developed to take on large complex audits.

Panel discussion

Professor Tawana Kupe, vice-chancellor and principal of UP, led the very interesting panel discussion that followed. The panel included Nkuhlu; senior counsel and former supreme court judge Professor Mervyn King (aka Mr Corporate Governance SA); and Professor Karin Barac, deputy dean of research and postgraduate studies in the faculty of economic and management sciences at UP.

Barac sees the ideas put forward in Nkuhlu’s book as, collectively, being an enabler or motivator to restore the respect in the profession. She spoke of the competing logic in the audit profession, commercialism versus professionalism. She also spoke of the complexity of business, and the need for greater scepticism to be displayed by accountant and auditors.

Due to the complexity, auditors often have to rely on experts, and these experts are in the consulting divisions of the audit practice.

Barac said universities teach in silos. Accounting and auditing students don’t understand much about business. It is important that students develop critical thinking skills and judgement.

Educators have a responsibility to deliver auditors with technical skills, and who will act in the public interest.

King, who along with Linda de Beer, is co-author of The Auditor: Quo Vadis (Routledge, June 2018), said that if one of the Big Four auditing firms (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) had to collapse, it would be disastrous for the audit profession.

King raised the very important point that smaller firms don’t have the capital to obtain artificial intelligence. Auditing a large bank requires artificial intelligence.

King is also of the view that audit rotation would put strain on the profession.

He further referred to the liability risk; the Big Four are exposed to hundreds of millions, and take out limited liability insurance. Hence, when a listed company goes under, audit firms are seen to have deep pockets. Auditors are often sued even where they have no culpability. He noted that bankruptcies are caused by many different events.

King mentioned an interesting anomaly: that when a director makes a bad business judgement, they are protected if they can demonstrate that it was a rational decision and there was no conflict of interest.

An auditor does not have this safe haven, and always has the Sword of Damocles hanging over their head. King said there should be an “auditor judgement rule”.

King emphasised that the auditor does not draw up the financial statements; the directors do. The auditor’s job is to ascertain that the financial statements are a fair reflection of the company, and are in accordance with International Financial Reporting Standards.

King said it is not possible to legislate an ethical state of mind.

An auditor should reflect on how they are adding value to society. King also said that companies should have intergenerational diversity. He said those who belong to Generation Z are different; they want value to be added to society. Companies must develop a global sustainability standard, he said.

Nkuhlu said the crux is to understand the desires that drive behaviour. If behaviour is driven by self-interest, and if this becomes a dominant driver of behaviour, the planet will end up crashing.

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As I expected, nothing about simply arresting and charging the enablers with crime and letting them serve time behind bars. All this circulocous and convoluted talk. Just a plain waste time, everybody knows what the rules are. If you go out there and underwrite crime you should be just as guilty. If, I drive a car to a bank to have it robbed, and I sit in my car, the bank gets robbed, and I drive the get away car, I am just as guilty as the bank robbers. WHy are the audting firns that cover for crimes, and let the criminals drive away with State or Investor funds, and resources, less guilty. Why are they not guity of being acommplices, and aiding and abetting the commission of a crime? Stop wasting time with Commissions and discussion panels. Lock them up!!!

A valid point in an uncomplicated world but nit in the complex wirld we live in today. Grateful thanks for sharing this gem to Barbara.

“King said it is not possible to legislate an ethical state of mind.”

An enabler of an ethical state of mind is the belief that you will go to jail if you get caught in a fraud.

Absolutely no and this definition is part of the problem in a country where few go to jail.

Ethics is what you do — or don’t do — when nobody is watching and you don’t think you will be caught. Fear of detection is not the same.

If rules are broken then auditors should be financially responsible and serve time in jail.

That would make white collar crime very un-attractive.

I doubt anyone wants to spend time in a South African jail.

If you want to clean up the profession, the governing bodies need bring the focus back to governance instead of spending inordinate amounts of time and money on a bursary scheme that does nothing other than flood the profession with entitlement and incompetence.

If you want to fix the profession:

– Stop focusing on pushing through incompetent candidates to get the demographic “numbers” right.

– Stop promoting incompetent “CA’s” to director and partner levels in the audit firms, for the purposes of showing that the “numbers” are right at the top level. A quick analysis at many of the top audit firms will highlight a dearth of “Directors” that can’t even draw up a basic cash flow statement, because their promotion to director was expedited without the requisite experience.

There are too many Kwinanas in the profession

Yes, case in point…Yakhe Kwinana. Need we say more….

The audit profession is purely a reflection of South African society in general. Lowered standards, no accountability, easy come, easy go.

Same as how to restore trust in a failed marriage due to trust issues?

Usually it never happens.

End of comments.

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