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Audit firms up in arms over Irba’s possible search and seizure powers

Treasury proposals a sign of its determination to get tough.

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.

‘Extreme’

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.

Frustration

“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.

Auditors respond

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.

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This is the only way for audit companies not to continue to look like monetary cleansing companies.

AMAZING! Some of the most bizarre comments I have yet seen.

Makes me ask myself – just how many “50 Cent Party” (look it up) types are actually operating here.

How about the regime uses its ‘muscle’ to pursue non-tax-payment in the taxi industry, from shebeens, spaza shops and actually start sending their (own) criminal class to jail – instead of terrorizing the small minority whom actually pay taxes – and generate around ninety percent of SA’s wealth.

If the auditors’ work is done properly, what is there to fear? There should however be a mechanism to ensure if the justification for the search and seizure is found to be baseless, that IRBA and whoever else is responsible for the unwarranted action is equally sanctioned.

Why should they be up in arms? If theyve been complying with the International Auditing Standards and reporting all irregularities they find to SARS and IRBA they’ve got nothing to worry about.

” Audit firms up in arms over Irba’s possible search and seizure powers” …

Oh dear, do the Audit firms have something to hide (Zuptas, EishKom, PIC, Surve/Independent Media, Denel, VBS, BOSASA … and the list goes on)?

“EY has suggested the act provide timelines to which detailed responses to requests for information by Irba must be received.” So that they can destroy any evidence?

“It appears that foreign audit regulators do not possess the powers of search and seizure,” Tonelli said in a submission to parliament-As an auditor, you do not say that-it either does or does not feature in foreign legislation. BTW, good luck when you dealing with Jillian Bailey(Right person for the job!)

Ultimately I do think this is a good idea. One should however be wary of over regulation as well as the risk that IRBA might be used by the government for other purposes, power can be abused here…

In all the state capture evidence to date, government was dead last to act. In fact the opposite.

If applied broadly I agree Jaco. But I think targeted legislation, maybe like that for biker gangs in parts of Australia, should be applied to auditors. In SA, they have probably caused more damage than the biker gangs in Oz.

Brilliant. I’m all for this.

If they want to act like criminals, they must be treated like criminals.

I wonder what the audit firms have to be afraid of if they contend that they have nothing to hide…..

Why be up in arms? If you are doing your job right with integrity,objectivity, professional competence and due care, confidentiality as allowed by the law and conducting yourself professionally, you have nothing to hide.

IRBA is a subsidiary of SAICA, I wonder how will all this go down. People go to school to become,lawyers and doctors etc. Similarly, people must go to school to specifically become Registered Professional Auditors, not CA’s and then R.A. The structure of IRBA and SAICA defies the ethics and values required by SAICA itself and perhaps IFAC.

SAICA is not a regulatory body but IRBA is, the law has been created to allow a “private” entity to capture and dictate a State organ. I wonder when will someone take this arrangement to the constitutional court.

Universal Rule:

NO body of ANY kind should be allowed to self-regulate by their own.

Auditors, Medics. Attorneys, Financial Advisors, Estate Agents, Politicians, Businessmen … it’s a long list.

NONE of them are trustworthy.

I agree.

Speaking from experience, the Law Society is the biggest joke.

“Rien ne réussit comme le succès’’
(Nothing succeeds like success)

Enron was a great Company – it used Wall Street magic to transform energy supplies into financial instruments that could be traded online like stocks and bonds.
What went wrong? Enron Chiefs were found Guilty of Fraud and Conspiracy. Enron filed for bankruptcy on December 2, 2001.This led to the dissolution of Arthur Andersen, which at the time was one of the “Big Five” – the world’s foremost accounting firms. The company was found guilty of obstruction of justice during 2002 for destroying documents related to the Enron audit.
What happened at Steinhoff?
What happened at the ‘’Guptas?
What happened at Bosasa?
What happened at Kebblegate and Investecgate? If you want to know – Read ‘’Day Six” – The worm turns for KPMG – one chapter that the late Barry Sergeant in his Book ‘’The Kebble Collusion’’ used to describe the fraud and destruction in the financial and mining sector – as reported by John Louw of JLCO. Methinks there are a plethora of ‘’delinquent’’ Directors (directly involved in this saga) walking around in the old SocGen and JCI, Investec, Allan Gray, KPMG, JCI etc.
My message to all these ‘’legalised crooks is: You have been running for more than 15 years – but you cannot hide!

At first glance, the new rules seem excellent: what could law-abiding, conscientious auditors have to fear?

But….
Clearly, Ms Bailey sets out by conflating “The fact that cases take long and fines are low “. Granting the invasive power of IRBA will not affect the size of the fines. If these are to be a deterrent, then this aspect of the Law must be changed: perhaps make fines relate to fees or losses incurred. But that will not affect the time taken.

If IRBA believes that firms are not complying with their request for audit files, then penalties for this should be imposed.

On further examination, a large part of the problem is the current climate of moral decay and junking of the Rule of Law; the only body which can remedy this is the ANC, which began the rot.

Another part of the problem is IRBA itself. Under Bernard Aghulas it has focused on “transformation”. While a worthy goal, it is not the task of a regulatory body. In addition, IRBA’s board is packed with non-accountants and Friends Of The ANC. Why should anybody not expect ethics-shedding when every other aspect of the state is being “shed”?

While the ANC’s kneejerk reaction is to steal if there is money and regulate if it’s the productive sector, the existing laws and regulations are perfectly adequate to act as post-facto deterrents.

But changing the culture of dishonesty begins with government, followed by IRBA itself. Like sticking to a diet, self-regulation is far harder than prescription.

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