EDITORIAL: Bad defending, bad goalkeeping in financial scandals
What about other defenders who should have been there: company directors, who bear ultimate responsibility?
A senior audit partner at one of SA’s big firms uses a football analogy to talk about the fire that auditors have come under for their role in recent financial scandals. The auditors — the goalkeepers — have taken a lot of blame for failing to catch these. But what about other defenders who should have been there: company directors, who bear ultimate responsibility?
Questions about the role of auditors and that of directors are at centre stage after a week in which embattled KPMG was fired by the auditor-general. This followed the disaster of its VBS Mutual Bank audit. And Steinhoff held an annual general meeting that could only be described as bizarre.
Steinhoff’s market value has collapsed from R300bn to just over R11bn after it revealed "accounting irregularities" late in 2017. Though it has emerged that Markus Jooste, who resigned as CEO in December, may have conducted some fancy financial engineering to inflate profits and asset values, there is still precious little hard information available on what happened or what the company’s value might actually be.
SA is already losing the high audit standards that used to ensure it is in the global competitiveness rankings. It cannot afford to let the profession’s reputation slide any further
And while most annual general meetings would be forums where shareholders would consider the financial statements, at this one there were no financial statements.
The company disclosed some information on its debt (€10.4bn). But Steinhoff told shareholders not to expect audited financial results for the year to March 2017 until the end of 2018. Audited results for the most recent year to March 2018 might come only later. That is a very long time to leave shareholders, who have made gigantic losses, in the dark. But Steinhoff and its auditors, Deloitte, have to wait, it seems, for the outcome of a forensic investigation by PwC before the audit can be finalised.
Such uncertainty about the timelines and the financials is quite extraordinary and raises huge questions. Citadel analyst Adrian Saville reckons it indicates the most spectacular fraud — and the length of time to produce audited financials tells you just how orchestrated and engineered it must have been. But if it wasn’t fraud, says Saville, it was an incredible lapse in corporate governance.
Steinhoff’s shareholders, auditors and regulators need to grapple with those questions, and the pressure needs to be kept up for much more transparency and accountability than the company has offered until now. For the audit profession, the Steinhoff scandal is another in a string of scandals that has severely undermined the profession, denting public trust in the goalkeepers and prompting soul searching among auditors, their clients and their regulators about what to do to regain that trust. The soul searching is much needed: the profession has a crucial social responsibility and if commercial imperatives have tended to dominate, auditors need to go back to the basics of the assurance and comfort they are meant to provide to investors, markets, civil society and governments.
In KPMG’s case the cumulative damage is such that the firm could well go under. This cannot be good for SA. The sector is already dominated by the big four audit firms, the expertise and capacity of which, particularly in banking, cannot easily be replicated by smaller firms. Losing one firm would make an already concentrated sector even more concentrated. As it is, KPMG is already losing clients and losing partners, not only to rival firms but to other countries, so SA is losing those vital skills.
SA is already losing the high audit standards that used to ensure it is in the global competitiveness rankings. It cannot afford to let the profession’s reputation slide any further. Structural remedies such as the Independent Regulatory Board’s idea of splitting audit and advisory are hardly the solution to the more profound ills that have seen the profession lose its way. The goalkeepers need to take a good, hard look at what’s gone wrong and how public trust can be rebuilt.
But so too do the directors of the companies under whose watch these financial scandals have happened.