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Tainted profession

It’s time those in auditing realised that losing a reputation is a bit like Ernest Hemingway’s description of going bankrupt – it happens gradually, then suddenly.
Does progress within the ranks of the once-noble profession come at a personal cost to those who enter it? Image: Shutterstock

Jenitha John resigns as CEO of the Independent Regulatory Board for Auditors (Irba), Deloitte agrees to pay R1.3 billion compensation to Steinhoff claimants on a no-blame basis, and KPMG undertakes not to provide non-audit services to JSE-listed companies that it audits.

The common thread in these three developments is a profession that is devoid of self-awareness and has done so much harm to itself – and the public it is supposed to serve – that it hardly deserves to survive.

The very fact that John applied for the CEO position at Irba automatically rendered her inappropriate for it; only in the contrived world of finance could we be expected to believe Deloitte is innocent, even as it dishes out R1.3 billion to ‘victims’; and how is it possible that KPMG or any audit firm is still allowed to provide non-audit services to its audit clients?

It is utterly astounding that these flawed institutions are able to peddle expensive consultancy services to their wealthy audit clients.

And not only peddle those services but claim there are no conflicts of interest or that any that might exist are well-managed.

The lack of self-awareness in the profession is astounding.

Irba’s error in judgement

But getting back to John and her controversial tenure as head of Irba. It is of course important to point out that John has been found guilty of absolutely nothing by either a regulator or a court.

But for eight long years she was at the scene of what you might call a long-running ‘audit crime’. Refusing to acknowledge any responsibility for what played out at Tongaat while she was chair of the audit committee reflects a grim lack of self-awareness and leads to a logical conclusion that would upend corporate governance.

“Non-executive directors are required to probe, challenge and monitor assurance providers to determine the veracity of information presented at board meetings – and it can be proved that Tongaat’s audit committee did just that,” John told the Financial Mail earlier this month.

If that is indeed so, then – given the long-running nature of the life-threatening accounting problems at Tongaat – perhaps it is time to scrap the pretence of board oversight altogether.

Would things have been much worse at Tongaat if there had been no board? (Likewise at Steinhoff.)

We hardly need reminding that no director has been held to have had any responsibility for any wrongdoing at a JSE-listed company.

Perception

The problem for Irba is that as a regulator with limited resources, perception is crucial.

In a perfect world, the mere expression of concern by Irba should be sufficient to rein in aberrant behaviour at audit firms keen to protect their reputation.

Read:
Long road ahead for Irba’s recovery
Irba board divisions were not caused by the incoming CEO – Motala

Of course we’re not in a perfect world. As we know from former Irba CEO Bernard Aghulas’s efforts to introduce mandatory audit rotation, even before John’s appointment any muscle-flexing by Irba was met by a concerted pushback from audit firms keen to protect their turf rather than their reputations.

As for the notion that South Africa’s audit profession was ranked number one in the world, the World Economic Forum survey that produced that headline-grabbing claim wilts under any sort of scrutiny. Indeed it’s the sort of claim that requires a lack of self-awareness to be attributed with much value.

Good luck to Nonkululeko Gobodo and Roy Andersen, the Irba caretakers appointed by Finance Minister Tito Mboweni. It is still very early days but they have gotten off to an encouraging start.

And then there’s Deloitte’s Steinhoff ‘deal’ …

In this imperfect world it is evidently acceptable for those in authority to present a contrived solution involving a hefty payment without any admission of guilt. So again, nobody is responsible.

Over at KPMG things look a tad more hopeful

Chair Wiseman Nkuhlu and KPMG South Africa CEO Ignatius Sehoole deserve commendation for trying to halt the audit profession’s spiral into ignominious irrelevance. Given the imminent existential threat it faced, it’s tempting to say Nkuhlu and Sehoole had no choice. Perhaps.

Their plan to stop providing non-audit services to the firm’s large listed audit clients reflects the realisation that few outside the audit profession believe the inevitable consequences are manageable. And as Sehoole says, it’s only a matter of time before regulators demand this, which means that by being a little ahead of the pack KPMG may be able to claw back some of the market share it lost when it got embroiled in state capture.

It’s time the audit profession realised that losing a reputation is a bit like Ernest Hemingway’s description of going bankrupt – it happens gradually, then suddenly.

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If it was possible for a few bad apples in the audit profession to taint the image of the entire profession, then it should also be possible for a few high-class prostitutes to improve the image of that profession.

This platitude is so typically SA “We hardly need reminding that no director has been held to have had any responsibility for any wrongdoing at a JSE-listed company.”

Very similar to no ANC cadre (pretty much) ever being held responsible for the corruption and incompetence destroying South Africa. It points to a lack of will, direction, competence and honesty that runs deep.

Here we go again. It’s those pesky auditors again, cooking the books. Never mind the fact that SA is a criminal, corrupt country with politicians and the champions of industry leading the way. Never mind the fact that Joe Soap is equally as morally and ethically corrupt. But no, it must be the auditors. Its like blaming the preacher, because people sin. It is a sad reality that most SA auditors put in way more hours than what they eventually bill, trying to ensure that the criminal, corrupt practices their customers tried to hide away, are unearthed. But that is ignored. Rather, it is suggested that auditors are incompetent, complicit, negligent or malicious. It is, however, strange that this phenomenon is peculiar to corrupt, criminal countries such as SA. It is in countries such as SA that an insane level of diligent scrutiny is required. It doesn’t happen in the US, UK, Japan, or Germany, where our level of criminality doesn’t exist. At the end of the day it is our own bankrupt moral and ethical attitude that needs adjustment, which is not the responsibility of auditors to rectify (and for the record, when malfeasance is found, it must be reported, or the financials must be qualified and when it’s not, it is indeed a criminal act by the auditor). In order for us to rectify this problem, we must start at the source of the problem, which is our own criminal intent. Fix that and you won’t need auditors to catch crooks, but to do what they are meant to do, which is to confirm, based on a SAMPLE of transactions of the customer, that the books reflect a true state of the financials of the customer, measured against international standards. If we can’t fix our own criminality, then we must rather look at what we expect of auditors. If it is to catch criminals, then we must change the auditing guidelines, processes and procedures… and while we are at it, also determine who is to pay for auditors completely redoing a customer’s books. But hey, its just much easier to blame the auditor for a dysfunctional, corrupt, criminal country.

Enron and Arthur Andersen.
Worldcom and Arthur Andersen.
Tyco and PwC.
Freddie Mac and PwC.
AIG and PwC.
Lehman and Ernst & Young.
Bernie Madoff and David G. Friehling.

Batman – your arguments are sound however there are always bad apples, which unfortunately taint the entire barrel. Maybe what is needed is that those who are the bad apples are identified and criminally charged and jailed. This is not only the auditing fraternity that should be charged and convicted but all arms of government and industry – we need ethics and honesty in this country

The auditing profession may ahve been started with good intentions, but it provides painfully little value in terms of the intentions of auditing.

It’s very much a self-serving profession that milks its clients due to auditing being mandated by legislation.

That have done themselves no favours and quite frankly, I despise auditors.

The very notion that these accounting firms serve the interests of the public is laughable/ cryable.

In the corporate world, sailing the accountant sea is what it is all about. Many of the top dogs used to be (un)able seaman, lieutenants of the watch on the Captain’s bridge.

These firms and their elites design the structures or “ships” that sail these seas and invent the entire environments in which they operate, down to the water in which they cut wake in and plot whatever course they choose.

The rest of us mortals have no clue really.

They are perfectly positioned in the crow and eagle nests to receive all relevant information far in advance. This they channel selectively amongst their cronies in the pecking order of their off-book organigrams. Corporate vultures and hyenas.

The accountants control the banks, whose boards they stack with lawyers who keep all else in tow and scurry the rats below decks.

Everybody gets to hear what they want them to know.. and only when they want them to know it.

Well overdue to put a blindfold on the pirates and make them walk the plank, or simply throw them overboard to the sharks and crocs or row them inland to the lions and tigers.

And the rest of us are just clueless, innocent and pitiful victim who need the holy and almighty officials and politicians who are always beyond reproach to protect us from the sharks in this world.

Where does this leave the frugal single mother who invested in Steinhoff, whose son is an honest and hardworking auditor at a small accounting firm? She brought him into this world. Does she now deserve to lose her investment?

Signed off the accounts without performing due diligence?

Cooked the Books?

Traded as an insider or handed deals on a plate to your cronies?

Lets see some major jail time and mega-fines… might as well start with the President. Viva!

“perhaps it is time to scrap the pretence of board oversight altogether”

A point that’s worth exploring. Much of the voting power in listed companies lies with institutional shareholders and nomineee companies who , it is often observed, don’t do much on the governance front even though they have the skills and clout to do so.

So I would think along the the lines of disintermediation : replace the board and its subcommittees with a committee of major shareholders, still with a fiduciary duty to all (other) shareholders and liability (in a form much more readily enforceable than at present) to them for breach of it. That leaves nobody in the governance structure, including auditors, beholden to management.

Auditors sign off that the numbers comply to IFRS. I could take five years of the actual (real) transactions of a single company and present any number of IFRS-compliant AFS for the same transactions that are not recognisably the same company. It all depends on the management-judgement of dozens of items. Journal entries instead of cashflow.

Shareholders could not afford the audit fees of a full audit. Auditors cannot audit for management fraud. Management are mostly not material, personally invested cash at risk shareholders and are incentivised on the wrong (short term) measures.

Audit firms do not nowadays have the operational / industry skilled people to challenge management-judgement matters. And to make things worse they have that Rep Letter to cover them.

Investment managers at the funds have mostly never worked a day in the industry they cover and cannot interpret accounts. The likes of Steinhoff was a slow motion train wreck for anybody that looked at cashflow versus reported earnings. It was not by any means a surprise!

One can only look at long term track records of actual cash-backed return on capital invested as an individual investor.

Several interesting comments.
But Ann’s article does highlight what most auditors would question at heart:
1.Why would a long-serving Tongaat Audit Committee member apply for IRBA CEO position in the first place?
2.Why would Steinhoff’s auditors not be able to see the absence of real cashflow?
3,Why should the big firms not abstain from providing non-audit services to their listed audit clients.?

Probably most audits do serve their purpose and investors, institutional and small, ought be able to look up to the auditing profession.
There will always be bad apples, but if rotten ones are found they should be jailed.

If anyone from SAICA is reading this article and comments, you’ve just lost another member. Too many wrongdoings on your watch, with zero leadership…one would almost think you’re involved.

End of comments.

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