South African accountancy industry at loggerheads with regulators on weak delivery

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n its haste to bolster confidence in the South African auditing profession, the IRBA seems to have scored a number of own goals. Not least, the perception given by the Auditing Profession Amendment Act that auditors provide absolute, rather than reasonable, assurances, which auditors say is impossible. This has led to resentment amongst auditors who feel the IRBA is now just trying to catch them out on shoddy work, rather than support them to improve, which in turn has led to a huge skills crisis as auditors leave the profession and numbers of new recruits drop. This lack of skills has hindered the IRBA in pursuing legal cases where investors suffered significant losses, which, coupled with the bizarre fact that the Financial Reporting Standards council has not operated for two years, has left the IRBA looking toothless and South African accountancy like the Wild West. New regulations coming into force this year and next in the form of ISQM 1 in December and the Mandatory Audit Firm Rotation Act in April 2023, is aimed at changing that perception.

The IRBA expressed concern in May about the country's application of international accounting standards. A government entity that was supposed to oversee that South Africa adheres correctly to these reporting standards seems to have ceased to exist, leaving the door wide open for self-regulation by the country's private sector. The (IRBA) told the Standing Committee on Finance that South Africa's local accounting standards setting body, the Financial Reporting Standards Council, has not been operational for over two years.

Formed in 2011, the Financial Reporting Standards Council was supposed to set the standards for financial reporting for South Africa. It should also monitor how accountants and auditors adapt international reporting standards for local circumstances. While South Africa follows the international standards for accountants, there was no government body concerned with the interpretation and application of those for the South African environment. While it is the regulator for the auditing industry, IRBA has no jurisdiction over the setting of accounting standards in the country, and there is a risk that self-regulation is happening in the country, where interpretation of accounting standards is done by the private sector itself, claimed acting CEO Imre Nagy.

However, the IRBA has its own problems, chiefly, an irregular expenditure of R10.8 million. This related mainly to the procurement of specialist investigators that the IRBA appoints to probe high-profile cases. These included investigating auditors who were in charge of companies involved in accounting scandals, such as Steinhoff and Tongaat Hulett, as well as those who audited African Bank before its near-collapse in 2014. The regulator sourced these investigators without obtaining quotes from other service providers or going on an open tender between 2014 and 2020.

The IRBA is under pressure to show that it can hold auditors accountable, as it tries to salvage the profession's reputation. Parliament has also requested the regulator to prioritise and speedily investigate high profile cases because of the significant losses suffered by investors but this is proving difficult as Nagy pointed out that it was nigh on impossible to get quotations for contracts due to the scarcity of independent experts. The IRBA cannot use investigators that are currently practising in the industry to maintain independence in its investigations, which really narrows the choices to a very limited number of experts in the country.

This critical skills shortage is only getting worse. “Increased compliance and regulatory requirements are leading to experienced auditors leaving the profession – we are losing precious wisdom, which traditionally has been used to prime the newcomers to the profession,” says Bashier Adam, CEO of Nexia SAB&T. “Not only are prospective auditors rethinking their choice of profession, there are also a number of the so called ‘disruptors’ that have been aggressively recruiting South African auditors to work remotely for clients and audit firms in the US and Europe. South African auditors are highly sought after and many of them are looking for opportunities abroad.”

Adam warns that South Africa is losing its auditors and is not attracting nearly enough new entrants to the profession – as a result of its increased scrutiny, as well as opportunities abroad, many are wary of taking on the risk associated with being an auditor.

“While the Auditing Profession Amendment Act was intended to provide increased protection to public interest by providing the Regulator with increased powers, we believe that the Act has brought with it some unintended consequences,” says Maryke Van Deventer, associate director, technical, quality and risk at Nexia SAB&T. “For instance, there is a perception among registered auditors that the Regulator is not there to protect and enhance the profession, but rather to expose its shortcomings and discourage registered audit practitioners. This has led to prospective auditors reconsidering their choice of profession – nobody wants to be under constant scrutiny of the Regulator, whilst trying to render a professional service to its clients. Now, instead of working together, there is constant friction between the profession and the Regulator in matters of professional judgement.”

While South Africa has tried to move forward from it auditing scandals, nothing that has happened so far has increased confidence.

“The increased regulations and the application of same have had the unintended consequences of creating the impression that auditors are not meeting the required standards,” says Van Deventer. “The way regulations and standards are applied have the effect of implying that audits are not meant to provide reasonable, but absolute assurance – this is of course impractical, if not impossible. This gap in the interpretation of the purpose of the audit has resulted in the users of financial reports questioning the quality of these.”

In an effort to bolster confidence in financial reports, the Mandatory Audit Firm Rotation Act for auditors of all public interest entities will apply from 1 April 2023 and ISQM 1 will have to be adopted by all audit firms by December of this year.

Under the Mandatory Audit Firm Rotation Act, an audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors, shall not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years and the audit firm will only be eligible for reappointment as the auditor after the expiry of at least 5 financial years.

Despite the lack of confidence in South African auditors, audit firms themselves are needed to improve and measuring their own audit quality and ISQM1 will support this with its scalable standard that allows firms to evaluate risks and to develop their own strategies and responses. This will provide an honest evaluation of audit quality issues and allow firms to customise their approach to solving problems as they arise.

An important part of ISQM 1 is the way it is regulated. Regulators will have to ensure the regulation is robust enough to support adoption of the standard but also flexible enough to allow firms to implement the standard with their own customisation and scaling. Firms, on the other hand, will be responsible for implementing the standard with a high level of honesty and a commitment to quality management. The South African accountancy profession is looking to ISQM 1 to provide a framework that meets the expectations of the public of what a good audit is.

The headache of digitalisation is also waiting in the wings. “How auditors adapt to a life of digitalisation and automation will have a big impact in what the profession looks like in five to 10 years,” says Adam. “The growth of the advisory and outsourcing environment is high on the agenda of many audit firms – many of these firms are at a crossroads of which way to go – do they pursue the opportunities in the lucrative advisory space or continue to apply their skills in an increasingly risk audit landscape?”

Whatever path audit firms choose to take, they will have to hope their strategy sees them through an increasingly turbulent environment. While the economy bounced back in the first quarter of this year, there are concerns that, overall, South Africa is in a downward spiral. While the economy grew 3% from a year earlier, Bloomberg said that the country’s economy is trapped in a downward spiral and hasn’t grown by more than 3% annually since 2012. “Policy paralysis, weak business sentiment and high levels of crime continue to weigh on fixed investment spending, with companies wary of committing large sums of money to domestic projects,” it said.

The International Monetary Fund (IMF) warned in a note on 7 June that South Africa’s economy should be benefitting from a commodity price boom – but instead, it is frozen in a low-growth climate due to slow reform and policy integration from the government, and persistent problems with state-owned companies.

Foreign direct investment (FDI) is vital to South Africa as it looks to build the country’s infrastructure and longer-lasting growth. In June the country recorded foreign direct investment (FDI) inflows of 604.3 billion rand ($41.15 billion) in 2021, a big jump from inflows of 50.4 billion rand in 2020, according to the central bank. However, South Africa has struggled to attract foreign investments in the past decade due to increasing political and policy uncertainty, as well as weak growth. President Ramaphosa won an election in 2018 on a promise to revive investment through his Economic Reconstruction and Recovery Plan, setting an investment target of $100 billion over five years, but the pandemic and other long-running structural issues, including widespread corruption and ongoing infighting in the governing ANC, have stalled investment.