EDITORIAL: Overhaul looms for SA’s auditors
Here in SA we’ve had enough auditing disasters to know something is wrong. The case of VBS Mutual Bank, where KPMG’s lead banking partner was implicated in the corruption, is probably the worst of the lot
To a country convinced it is the exception to what is happening elsewhere, it’s probably a surprise that there is widespread consternation globally about the role that auditors should play in a modern economy.
Here in SA we’ve had enough auditing disasters to know something is wrong. The case of VBS Mutual Bank, where KPMG’s lead banking partner was implicated in the corruption, is probably the worst of the lot. But KPMG also failed in its audit of the Gupta family company Linkway Trading, while Deloitte’s auditors are under fire over their handling of microlender African Bank, which collapsed in 2013. And that’s before you even get to Steinhoff, or Tongaat Hulett.
But it hasn’t been plain sailing overseas either.
In the UK, auditor EY is being investigated for the audit it carried out at travel company Thomas Cook, which fell over last month. There’s also the British apparel retailer BHS, which collapsed in 2016 even after auditors PwC signed it off as a going concern, and construction company Carillion, where a parliamentary report found that KPMG failed to "exercise professional scepticism".
In India the government is seeking a five-year ban on the local affiliates of both KPMG and Deloitte for their role in helping hide bad loans at construction firm Infrastructure Leasing & Financial Services. Indian prosecutors claim the auditors "actively connived" with management — a claim which would resonate with those who’ve followed the VBS debacle in SA.
Still, auditors are shell-shocked, both by the failures happening under their watch, and by the viscerally angry reaction it has elicited from the public. After all, one of the first things they’re taught in accounts 101 is that auditors aren’t expected to detect fraud. In cases like Steinhoff, they’ll argue, how could they be expected to unearth a scheme that took more than 100 forensic auditors at PwC 18 months to unravel?
It’s a valid point, but it hints at the yawning disconnect between the way auditors see their job, and the way the public sees it. Auditors need to respond to this expectation, at the least.
This is why all eyes are on Sir Donald Brydon, who has been conducting a UK government probe into the profession for the past 10 months, seeking to improve the effectiveness of audits. While his findings will apply to the UK, other jurisdictions will be looking to him for guidance, given how these issues resonate beyond borders.
This week, however, Brydon did something few have done: he stood up to defend the profession from the mounting attacks.
"It is not auditors that cause companies to fail, that’s the result of the actions of directors," he said. "I’m a little troubled by the current mood that reaches for a shotgun aimed at auditors every time there’s a corporate problem."
What Brydon describes is the sort of kneejerk reaction we’ve seen in SA too, which lets directors, executives and others off the hook for their role in what happened.
Which isn’t to say auditors don’t have serious issues to grapple with. Locally, the profession needs to reassert the primacy of professional scepticism. And there needs to be a greater focus on jettisoning the mechanical "tick-box" approach of auditing, and factoring in the bigger picture of "nonfinancial factors". Of course, audits must improve, but it’s not as if the profession has magically become utterly useless overnight.
In a few weeks, Brydon will release his final report, which is expected to widen the responsibilities of auditors to report on risk, and move beyond a mundane compliance check. If SA wants to get serious about restoring trust in its corporate sector, it will have to follow suit.