Picture: 123RF/DMITRIY SHIRONOSOV
Picture: 123RF/DMITRIY SHIRONOSOV

Too many times, I’ve heard those charged with defending governance at companies that make headlines for the wrong reasons exclaim indignantly that it is preposterous to expect them to have had any idea of the pending business failure.

For those people, I have one piece of advice: resign.

It boggles the mind that some of those mandated to support governance — who include the members of audit committees and boards — have a misguided perception that exercising an oversight role is not part of what they are paid obscene amounts to do. Why else, do they imagine, are they there?

If they had no such responsibility in the first place, why would we not just leave a company’s executive to both exercise its managerial responsibilities and provide oversight?

In most jurisdictions, the governance model provides for just such a layer of defence (protection, in other words, for minority investors, staff and others in the broader economic system). It’s not dissimilar to the concept of an audit — the term itself implying a duty to check the work of others.

But herein lies the rub: at this point it’s not clear if those charged with governance truly understand their role, or whether they simply lack the required competence to exercise their duties diligently.

For a start, it isn’t clear that all audit committees and boards know that their job isn’t to simply accept without question information provided by the CEO or executive. Equally, it seems not all auditors are aware they are expected to do more than simply confirm information provided by the company.

Both are expected to assume a sceptical role, challenging the evidence even though it might appear authentic on the face of it.

It’s heartening that the various commissions into undesirable behaviour are now leading to consequences

To do so requires not only the necessary technical skills, but also the appropriate behavioural skills. In too many cases in recent business failures (which could also involve audit failures), these people may have ticked the skills box, but "forgot" to act with the required ethics, scepticism and independence.

These technical and behavioural skills are not mutually exclusive.

Given the wave of corruption we’ve seen sweeping the country, it’s apposite to ask to what extent the fact that this oversight role hasn’t been exercised properly has played a role — whether by design, or negligence?

The answer does not necessarily lie in the technical definitions of corruption. Rather, it is best captured in its archaic interpretation, "the process of decay, putrefaction".

Sure, it sounds severe — but how else would you describe the process in which millions of rands are lost to pensioners and the poor because of negligence, incompetence or a wilful intent to deceive by those expected to protect those financial interests?

Here, perhaps, we should reflect on the role of auditors. Quite clearly, not every business failure is an audit failure.

An audit failure occurs where the auditor expresses an incorrect audit opinion — for example, attesting that financial statements fairly present a company’s position when, in fact, they do not.

In these situations, investors also stand to lose their hard-earned money — but the criteria for determining auditors’ negligence or incompetence is derived from a different mandate.

This doesn’t mean that auditors cannot also fall foul of the vices cited above, but each link in the broader ecosystem has a specific role — and any weak link in the chain can have dire consequences for the people who need protection, such as pensioners.

In this context, it’s heartening to see that the various commissions into undesirable behaviour are now leading to consequences for perpetrators and those complicit in creating an environment in which corruption can flourish.

While it’s true to say that the right behaviour shouldn’t be entirely driven by the prospect of consequences, maybe it’s also true to say that the right consequences can drive the right behaviour.

  • Agulhas is former CEO of the Independent Regulatory Board for Auditors

 

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