Corporate failures take toll on South African audit

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igh-profile corporate failures continue to take their toll on the audit profession in South Africa. Tongaat Hulett accepted a fine from the Johannesburg Stock Exchange (JSE) last year relating to non-compliance with its listing requirements, but the global settlement of claims arising from legacy accounting issues at Steinhoff is yet to be completed.

The consensus within the profession seems to be that the government and regulatory bodies are committed to raising standards.

Bashier Adam, director of Nexia SAB&T, refers to the South African Institute of Chartered Accountants’ audit reform project, the Independent Regulatory Board for Auditors (IRBA) having its powers as the regulator of auditors extended and significantly strengthened through the Auditing Profession Amendment Act, and the audit profession commencing a voluntary initiative - the South African auditing profession trust initiative - aimed at restoring trust. “This is all in addition to various initiatives undertaken by individual audit firms,” he says. “I think it would be fair to say that South Africa has been fairly busy in trying to establish what went wrong and why and to take the necessary action to rectify same.”

According to Suresh Naidoo, director of PrimeGlobal member firm Accensis, the above failures were taken seriously by parliament with a parliamentary hearing held on Steinhoff debacle. “Criminal investigations are underway, but the complexity of the matters from a criminal perspective combined with the lack of suitable skills within our police services has slowed down the wheels of justice,” he says. “The intentions of government and the IRBA are very positive, but it will take some time to see any meaningful results.”

There is optimism in relation to the various court cases, investigations and commissions underway, but the longer these take to reach a conclusion the lower the potential impact of the findings. That is the warning from Abe Petersen, partner at MGI Bass Gordon, who also says there is growing concern over whether the sanctions imposed will be enough of a deterrent to help prevent future corporate and audit failures.

It is up to everyone in the profession to play a role in regaining trust suggests BDO South Africa CEO Mark Stewart. “For us it was the launch of our clarity charter,” he says. “Some initiatives undertaken by firms recently will help reduce the independence threat, which is often raised as a cause of these failures.

"Much of the confidence in the profession is based on public perception and it is possible the public will view mandatory audit firm rotation as an improvement while other initiatives such as the ministerial panel reviewing practices in the audit profession will also play a part in restoring credibility.”

The IRBA has said that its focus going forward will be on audit quality, sustainability and relevance of the regulator and the profession. However, it has suffered a number of setbacks recently.

“The previous board appointed a CEO who was seen as compromised by the profession and the public as a result of her being the chair of the audit committee of Tongaat Hulett at the time of that company’s accounting scandal,” explains Naidoo.

“The Minister of Finance had to intervene and remove the entire board, which was replaced by an interim committee and oversaw the exit of the CEO,” he adds. “There is an acting CEO in place until a permanent appointment is made. Until such time as stability is restored, there will be a lack of confidence even though the IRBA has some other really strong and capable executives.”

Petersen reckons the IRBA is positioned to drive the focus on audit quality, sustainability and the relevance of both the regulator and the profession but says its core focus should be on the areas that affect the public interest, restoring investor and public confidence in the audit process specifically around public interest entities and state-owned enterprises. “Of course, before the IRBA can focus on restoring confidence in the audit process it must first restore confidence in its own internal governance processes and structures,” he adds.

A critical aspect of the sustainability of the regulator is to ensure that an appropriate funding model is developed, adds Stewart. “A regulator requires adequate resources to deal with matters expeditiously - this removes long periods of procedural uncertainty for the professionals involved and allows the public to gain confidence in having regulatory matters resolved,” he says.

According to Adam, while it would be fair to say that the IRBA generally attempts to consult as widely as possible when it comes to proposed reforms, the results of such consultations are not always reflected in the proposed changes. “This must be considered in the light of the IRBA’s role as the regulator,” he says.

The processes employed by IRBA ensure that all members have the opportunity to make comment. “Prior to the pandemic, in addition to written input members were invited to roadshows to give input,” observes Naidoo. “Members views are considered, but the regulator must maintain its independence and consider what is in the public interest and not only the interests of its members.”

As a regulator of a wide spectrum of audit professionals ranging from small and medium practitioners to the larger network firms, it is not an easy task to address all the concerns raised by various firms suggests Petersen.

“There are numerous channels and interventions in place which assist with creating transparency and feedback and these do help with giving firms the sense that their concerns are taken notice of,” he continues.

When asked whether the Auditing Profession Amendment Act is a positive development for the audit profession in South Africa, Stewart suggests that any effort to speed up the disciplinary processes applicable to auditors should be welcomed.

“For too long matters have remained unresolved for years,” he says. “A concern is the quantum of penalties that may be levied when an auditor is found guilty. This uncertainty is impacting on the decisions made by those who are considering whether to remain in the profession and there are conversations that some firms are having as to the sustainability of the audit practices.”

He warns that it is critical that the profession becomes more attractive to younger professionals who have the choice of alternative careers which on the face of it seem to be more financially rewarding with less risk.

Adam agrees, noting that South Africa is faced with an acute skills shortage in the audit profession. “One of the unforeseen consequences of the act is that it may result in the audit profession becoming less attractive to new entrants, something it can ill afford,” he adds.

According to Petersen, the act will go a long way to giving the regulator enhanced powers and removing some limitations inherent in the Auditing Professions Act of 2005. “However, it must be noted that it is up to the regulator to ensure it delivers effectively and efficiently on its mandate to protect the public interest and this can only be driven by its own leadership and structures,” he says. “A well-functioning, focused regulator with increased powers will have a greater chance of restoring public confidence in the audit process and the profession.”

Having referred to the potential for mandatory audit firm rotation to boost public confidence in the profession, BDO tracking shows the extent to which JSE-listed companies have gone down this road.

“Over the last 10 months, approximately 52% of these companies have moved from one big four firm to another, while seven per cent have moved between mid-tier firms,” explains Stewart.

A further 27% have moved from a big four to a mid-tier firm and five per cent have gone the other way. Five per cent have moved to joint auditors (including a mid-tier firm) and two per cent have changed from joint auditors including a mid-tier audit firm to a big four firm, with one entity not having made a decision yet. “Analysis of these clients suggests that it is mainly small-cap size entities moving away from the big four audit firms,” adds Stewart.

These moves indicate a wide acceptance of mandatory audit firm rotation suggests Naidoo. “Some large local subsidiaries of internationally listed companies – such as Unilever - have rotated auditors following the lead of the international parent company,” he says.

When asked whether there have there been many examples of larger firms being appointed jointly with small and/or black-owned firms to boost the skills development of smaller audit firms in South Africa, Adam says there have been only a few.

“More opportunities are presenting themselves to non-big four firms, but this appears to be limited to the small and mid-cap sector as opposed to the really large-listed companies,” he continues. “One of course must consider the fact that in order to be considered as auditors of JSE listed firms, firms need to be accredited by the JSE and many of the smaller firms have opted not to pursue such accreditation.”

When the IRBA promoted mandatory audit firm rotation, one of its stated benefits was allowing black firms the opportunity to rotate onto jobs previously not available to them.

“Unfortunately, this has not happened as the decision makers in the JSE listed entity remain largely white and conservative,” concludes Naidoo. “On the plus side, Grant Thornton is now a predominately black firm and should make inroads into this market. At this time the Big Four have held on to most of the work, albeit some with musical chairs between them.”