Why auditing ‘is not in a good space’
The auditing profession is deep in introspection after Steinhoff, Tongaat and others, and sees a need for broad change
The intense scrutiny of auditors ignores problems of accountability in other parts of the financial reporting chain, says Bernard Agulhas, the CEO of the Independent Regulatory Board for Auditors (Irba).
Agulhas was speaking at the Southern African internal audit conference in Sandton this week, where he agreed with most speakers that "auditing is not in a good space".
Many of the presentations made frequent allusions to the auditing failures at Steinhoff, Tongaat Hulett and VBS Mutual Bank, and how this had hurt the image of SA.
"External auditors sell confidence. When investors have confidence, they will invest, and that will stimulate the market," he said.
He said auditors are the only link in the reporting chain that is regulated. In contrast, company boards, internal auditors, company audit committees and accountants are not. "We’ve seen with Steinhoff that it wasn’t just the auditors who might be at fault — there are others too," he said.
It’s a lacuna, since the failings that harm auditors — a lack of independence, professional scepticism and ethics — can be just as problematic elsewhere.
But it isn’t a coincidence that these scandals are happening in an era of rampant state corruption.
As economist Miriam Altman put it: "Some politicians say: ‘Yeah, but [these lapses] are in the private sector too.’ The reality is, as much as that’s very true, the public sector sets the tone."
Discussing how auditing has lost its way, Agulhas spoke of how adherence to exhaustive rules has created a tick-box mentality, leading some auditors to go through the motions "without thinking". This obsession with methodology is often at the expense of independent, analytical thinking, which means you "won’t necessarily get to the right answer".
Steps are being taken to fix this. For example, firms are including far more "nonfinancial" factors when they audit companies. Others are hiring from outside the accounting mainstream.
But one of the problems common to both the government and private sector is that there has been zero accountability. No-one has gone to jail, even though companies like KPMG have lost hundreds of millions of rands’ worth of business.
Agulhas said Irba is ratcheting up the consequences for getting things wrong: fines are being hiked dramatically, as are the sanctions for messing up an audit.
Altman believes this could make a big difference. "There has to be accountability and consequence in the system," she said.