SA’s biggest audit firms are riled by amendments to legislation that could give the Independent Regulatory Board for Auditors (Irba) more teeth in the form of search and seizure powers during its investigations into financial reporting failures.
If proposed amendments to the Auditing Profession Act by National Treasury pass muster in parliament, they will give the audit watchdog the power to search the premises of auditors and seize documents in the course of conducting its investigations.
Irba’s investigating committee would be able to enter the premises of auditors without prior consent or notice if accompanied by a warrant issued by a court.
Irba would join the ranks of market regulators including the Competition Commission and the Financial Services Conduct Authority, which enjoy such powers.
SA’s biggest auditors, including PwC and Deloitte, are opposing the proposed amendments saying Irba’s powers would be extreme, while the watchdog believes they are necessary to give it more muscle.
The amendments come at a time when audit firms are facing a credibility crisis over their complicity in the state capture project and corruption.
Irba has finalised its investigation against former KPMG employee Jacques Wessels, who helped the controversial Gupta family commit tax evasion of more than R2 million. KPMG is also implicated in the VBS Mutual Bank scandal as its senior audit partner Sipho Malaba allegedly received more than R33 million from the bank irregularly. Irba is investigating Malaba’s audit of VBS.
Irba is also investigating Deloitte partners in two separate matters; missing red flags in African Bank after its collapse in 2014, and signing off the books of Steinhoff after the company admitted to accounting fraud in 2017.
Irba CEO Bernard Agulhas says the audit regulator needs more powers in order to finalise investigations that have been delayed by the non-cooperation of errant auditors.
“If we have search and seizure, at least we won’t waste time and effort in running after auditors and working with their lawyers to get information during our investigations,” Agulhas told Moneyweb. “The search and seizures will take that frustration out of the equation.”
The wheels turn slowly in audit investigations: Irba’s probe into KPMG’s Wessels took two years to finalise; the start of disciplinary hearings into Deloitte for its African Bank audit took more than three years, and the investigation of Deloitte’s Steinhoff audit is ongoing.
In its 2018/17 financial year, Irba initiated 112 new investigations and finalised 66 investigations.
Auditors are not allowed to refuse to produce any information requested by Irba under the Auditing Profession Act (in its current form) – even if it is confidential information about a client. Non-compliance with Irba’s information request is an offence.
Slaps on the wrist, not a deterrent
However, as Irba director of investigations Jillian Bailey points out, sanctions for audit breaches are not onerous, which doesn’t deter errant behaviour by auditors. Irba sanctions include a maximum fine of R200 000 per charge – meaning that if an auditor is found guilty on five charges, the penalty will be R1 million. Arguably, this is a pittance when auditors are raking in more than R150 million in audit fees.
“The fact that cases take long and fines are low – they are not acting as a deterrent,” says Bailey. “You have to make cases run quicker and fines have to be enough to deter the behaviour.”
The proposed amendments to the act will also give the finance minister the discretion to determine the limit of fines, which can be more than R200 000.
PwC COO Fulvio Tonelli says the proposed search and seizure powers are out of balance with the powers of the regulator and may lead to an abuse of constitutional rights.
“It appears that foreign audit regulators do not possess the powers of search and seizure,” Tonelli said in a submission to parliament. “Search and seizure powers are universally limited to those regulators and prosecutors with authority to bring criminal charges. We submit that Irba’s current powers to investigate and subpoena documents is sufficient and should not warrant constitutional rights being infringed or limited.”
EY’s professional practice director Roger Hillen has recommended the removal of the search and seizure powers from the draft amendment. “If they are carried through into law, as they are currently written, they will grant a regulatory body for auditors more power than the Saps [South African Police Service].”
EY has suggested the act provide timelines to which detailed responses to requests for information by Irba must be received. “We would even understand and recognise the imposition of pecuniary fines in the event such deadlines are missed, or the information received is clearly to placate the Irba and not assist with the investigation.”
Deloitte wants a search and entry warrant to be “the exceptional remedy of last resort after all available remedies have been exhausted”. It also wants a judicial officer to determine whether there are “reasonable grounds to suspect non-compliance”.
KPMG told Moneyweb that it had not made a submission on the amendments.