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Auditing regulator needs to bare its teeth on corporate malfeasance

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Ruan has been a financial writer for 18 years. The fact that she is always surrounded by people smarter than her is her favourite perk of the job. Her previous stints include editor positions at Financial Mail, Business Day and Finweek. She has also ventured into corporate, public relations and even tried working for herself, but couldn't get to grips with her own management style. She returned to her first love: financial journalism in 2019 by joining the Business Maverick Team as Associate Editor. Ruan dotes over her rescue dogs and talks about them non-stop. She blames them for not being able to own nice things.

Auditing failures in South Africa have come at great public cost. With better oversight, this may have been avoidable. Enter the Independent Regulatory Board for Auditors.

It might come as a surprise to millions of South Africans that there is a statutory regulator that could almost certainly have put a stop to the rampant corruption in the country.

In fact, this regulator oversees the last line of defence against corporate malfeasance – the auditors.

This is the Independent Regulatory Board for Auditors, better known as IRBA,  the statutory body reporting to the National Treasury and established in terms of the Auditing Profession Act, Act 26 of 2005.

South Africans might be forgiven for scoffing at the role that IRBA claims to fulfil on its website: “The function of IRBA is to help create an ethical, value-driven financial sector that encourages investment, creates confidence in the financial markets and promotes sound practices.”

Audit failures in South Africa have come at great public cost. Just look at the impact on jobs and pension funds. Deloitte’s conduct at Steinhoff and Tongaat Hulett are recent examples, but who can forget poor audit performance at Eskom, VBS and African Bank?

Perhaps the costliest audit failure of all time was KPMG’s SARS Rogue Unit report, which some argue brought SARS to its knees.

It’s all part of the global phenomenon. Wirecard investors abroad have EY to blame, which was also an auditor for Lehman Brothers, the collapse of which was one of the catalysts in the subprime mortgage scandal that precipitated the global financial crisis.

Wirecard has a subsidiary in Cape Town. Despite all these spectacular failures, not one of these auditing firms has been held to account for its negligence or possible complicity.

But the SA Institute of Chartered Accountants recently patted itself on the back in spectacular fashion for withdrawing former Eskom CFO Anoj Singh’s membership – despite him having withdrawn his membership in 2018 – and then launched an impressive public relations blitz in an apparent attempt to plaster over the industry’s reputation, which is in tatters.

Open Secrets, a non-profit organisation which exposes and builds accountability for private sector economic crimes through investigative research, advocacy and the law, has called on regulators and policymakers to hold these beancounters to account. Yet, despite the failure of the auditing industry, which has cost taxpayers billions and perhaps trillions of rands over the years, only a handful of industry professionals have faced sanction.

Deloitte, for example, is fighting IRBA tooth and nail to have 10 charges quashed against its auditing partner and now Deputy CEO for Africa Mgcinisihlalo Jordan for signing off financials before the demise of African Bank.

IRBA contends that he breached intentional auditing standards, in addition to misconduct.

By and large, those auditors who signed off on audit reports in companies like VBS or Steinhoff remain anonymous, almost as anonymous as IRBA itself judging by its light caseload in comparison with ongoing failures.

What about the auditors that penned and signed off the SARS “Rogue Unit” report?

It’s imperative to point out that corruption and company failures – which seems to be a national sport in South Africa – will be extremely difficult to get away with if auditors did their jobs or if they weren’t in some way wilfully complicit in the corruption in the first place.

In the Three Lines of Defence risk governance framework, auditing, and more specifically independent assurance, is the third and final line of defence (after the management and control measures, and specialised risk and management).

That means in the private sector, auditors must ensure a company is not overstating assets and revenue, and hiding losses. However, in the public sector, the primary role of independent assurance is ensuring compliance with the Public Finance Management Act, ensuring procedures and governance structures are working, and possibly most important of all, ensuring that procurement deals are above board in every respect.

Three critical questions come to mind:

If auditors are executing their functions, why is corruption so pervasive in the country to the extent that corruption is now ingrained in the psyche of every South African across every community, income group and race?

Why are judicial commissions of inquiry and criminal investigations seemingly stopping short of publicly investigating and punishing auditors, and only seem to take action regarding high-profile cases? What exactly is the role of auditing regulator IRBA and how exactly is the industry audited?

Perhaps it all comes down to the fact that the industry is self-regulated and one needs to question whether auditing partners have a vested interest in properly investigating their partners, running the risk of professional indemnity insurance skyrocketing or an auditing firm being blacklisted altogether.

Furthermore, IRBA must be probed on how it conducts quality assurance, how it chooses which companies to audit and for what. IRBA is seemingly continuously playing catch-up and perhaps it needs a dedicated team looking into allegations by whistle-blowers and the media, which break news on corruption more often than not. DM/BM

 

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  • You mention Tongaat Hulett as a recent audit failure. I understand that the non-executive director at Tongaat Hulett, who was chair of the audit committee for 10 years (including the years of material irregularities), was recently appointed to the most senior position in IRBA. She had previously resigned from the board of Tongaat for “personal reasons”. This issue surely deserves a paragraph in the report? The appointment of this person was questioned in Parliament – because of her disturbing record both as a CA and as a director – but I have seen no further account of how this appointment can be squared with the need to tidy up the accounting profession. The incident was detailed in an expose of auditors’ malfeasance by Open Secrets.

  • Very good story Ruan. Could add a lot more such as Arthur Brown and Fidentia And the huge property syndication scams. And then there is also the Actuarial Society of South Africa which has allowed enormous rip offs in the long and short terms insurance industries

  • When an IRBA tries to nail a firm, it is up against smart people with deep pockets and a lot at stake. Now ask yourselves whether it will have been given matching resources and motivation.

  • You will note that all of the cases quoted are the big 4 audit firms. The likely reaction of IRBA will be to clamp down on the mid tier and smaller firms. Making compliance more onerous for the smaller firms results in an undue dominance by the big 4.