The status quo in the audit profession can no longer be tolerated
As Prof Wiseman Nkuhlu says, trust in institutions is a key determinant of economic progress and is crucial to a nation’s prospects
The launch on September 18 of Prof Wiseman Nkuhlu’s memoir of his time as chair of KPMG SA from January 2018 to March 2020, Enabler or Victim? KPMG SA and State Capture, is a necessary reminder of the fundamental role of auditing and the need for greater reform in the profession.
Clinically, the purpose of an audit is to enhance the degree of confidence in a set of financial statements. This is achieved via an audit opinion on whether the financial statements are prepared in accordance with the relevant reporting frameworks or not.
But the world is not clinical. It is volatile and ambiguous. Organisations are increasingly complex and have a multitude of stakeholders to consider. Auditing plays a crucial role in the economy by cutting through this complexity and creating order in financial markets, based on trustworthy financial results that can be relied on. The role of an auditor in providing enhanced trust to stakeholders of these organisations therefore remains of paramount importance.
However, the profession has, in recent years, experienced numerous challenges resulting in an erosion of trust and greater scrutiny by stakeholders and the public. Criticism should not be ignored or disregarded by the audit profession as it shows that stakeholders appreciate the uniquely influential role auditors play.
It is therefore incumbent on the audit profession to accelerate its discussions on audit reform to improve audit quality and make sure the profession remains fit for purpose. These developments present an opportunity to improve the degree of trust in the existing audit product and redefine the scope to align more keenly with the public interest.
Audit reform cannot be the only answer to this problem. Tackling greed and malfeasance requires vigilance from all stakeholders. One wonders if the investing public, staff of the organisations in question and communities are using all the tools available to subject boards and management to scrutiny. Are professional fund managers and analysts, who are financial specialists, asking the right questions and probing the numbers as they should? Are boards, which are expected to provide oversight of management in the interest of the company and its stakeholders, sufficiently rigorous? I don’t believe we can answer these questions with a confident “yes”.
The finance professionals and auditors allegedly involved in the malfeasance mentioned above may not have adhered to the highest standards of competence and ethics. But if one truly wants to prevent this kinds of unethical and sometimes criminal conduct from happening again, or at least if one wants to make it difficult for criminal conduct to occur, all elements of this oversight ecosystem have to work better.
In his book, Nkuhlu describes enhancing trust as an extraordinarily important responsibility in any society. Trust, he says, is an essential ingredient in building co-operation and creating lasting relationships. Due to the public interest nature of the role of auditors, and given the interconnectedness of the audit profession with the financial ecosystem, it is imperative that effective solutions are devised.
Failure to prioritise audit reform could result in SA lagging behind its international peers. This could further jeopardise our competitive advantage as an investment destination and reverse the country’s progress on the development curve. Trust in institutions is a key determinant of economic progress, and without trusted institutions, Nkuhlu contests, it is exceedingly difficult to achieve sustained socio-economic modernisation.
Independent verification of the conduct of business by a trusted audit profession is crucial to the prospects of a nation. A trusted and independent audit profession is effectively a buttress against the abuse of power. It stands between the public and self-serving individuals seeking personal enrichment.
Attributes such as independence, objectivity and scepticism, argues Nkuhlu, are vital for auditors to be fit for purpose and for the profession to fulfil its role. Furthermore, he says there should be an inherent commitment to serve the public interest. In short, integrity, audit quality and serving the public interest should be at the very centre of an audit firm’s purpose. Nkuhlu is unequivocal about audit firms exercising extreme care in carrying out their duties and appreciating that their expertise has a significant impact on society. To this end it highlights the profession’s need to deeply understand its fundamental role in society — which is to enhance trust in financial reporting and global financial markets.
The private sector’s drive to maximise profits can serve as a catalyst for innovation and development, but it can also cause harm to society if not adequately regulated
The integrity of financial markets and security of the nation’s savings and investments depends on good governance and trust in the audited financial results. When the kind of alleged unethical behaviour we have been seeing lately happens, it not only harms investors, it diminishes faith in the integrity of reporting and trust in companies and markets — and this affects everyone. The message the SA Institute of Chartered Accountants (Saica) would like to send to the chartered accountancy and auditing professions is that we have been given positions of great power and public trust.
The vast majority of CA(SA)s and registered auditors take this responsibility incredibly seriously — they earn this trust through their professionalism, skill and ethics. Unfortunately, at present, it seems as if the auditing profession has lost sight of this fundamental calling and has been driven by the desire to maximise profits. In many respects, the drive for commercial success has become all-encompassing and at the expense of serving the public interest.
Clearly, the need for capable and credible regulators to contain the excesses of the private sector cannot be over-emphasised. As Nkuhlu highlights, the private sector’s drive to maximise profits can serve as a catalyst for innovation and development, but it can also cause harm to society if not adequately regulated. Given the nature of multinational corporations that have become a hallmark of contemporary commerce, the need to ensure the regulators are independent and able to facilitate meaningful discussion has increased significantly.
Saica will continue advocating that audit reform discussions not only be conducted on an ongoing basis, but that they be accelerated. In addition, solutions need to be comprehensively explored with all the relevant stakeholders, including regulators, the government, accounting institutions, audit committees, users of audit reports and the audit firms. The institute is also encouraging all auditors to get involved in these important engagements and assume a meaningful role in restoring trust in the profession.
Most important, what the required reform points to is that there should be greater collaboration between stakeholders and assurance providers. None of the audit reforms will be meaningful unless a platform for such collaboration is created. Therefore, Saica will continue to advocate for such dialogue among all affected parties.
In reflecting on how best to strengthen the audit profession, Nkuhlu believes he is not alone in his view that the status quo is deeply flawed and should not be allowed to continue. A fundamental transformation is necessary. The central question he asks is will we act now or continue to kick the can down the road and wait for another big audit failure with even more far-reaching implications for society?
Saica therefore acknowledges the opportunity that arises from the publication of Nkuhlu’s book for all stakeholders in the auditing profession to once again revisit the necessity to act on improving trust in the profession.
• Nomvalo is CEO of the SA Institute of Chartered Accountants.
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