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Picture: 123RF/anafox
Picture: 123RF/anafox

Former Wits University auditing professor Steven Firer, in a recent opinion piece (On My Mind, June 2-8), suggests that the Zondo commission into state capture misdirected itself. First, he says, it placed all the blame on the auditing profession for facilitating, enabling and turning a blind eye to state capture at state-owned entities (SOEs). And, second, it held auditors accountable for actions that were far removed from their legal obligations.

Firer’s argument appears to be based on the following:

  • That directors (the accounting authority of SOEs) are responsible for the preparation and accuracy of annual financial statements, and the auditors’ responsibility is to express an opinion as to whether those statements are represented fairly;
  • That the auditor is not the guarantor of the accuracy of those financial statements;
  • That the concept of “materiality” is misunderstood by those criticising the performance of the auditing profession;
  • That the Zondo commission failed to recognise that, in the case of an SOE, it is the accounting authority and not the auditor that is responsible for the accuracy of financial statements; and
  • That, because auditing is an art and not a science, professional judgment is vital, and the Zondo commission failed to acknowledge the judgment of auditors.

However, Firer’s views must be measured against both the requirements of the International Standards on Auditing (ISA) and statutes such as the Public Finance Management Act (PFMA) that govern SOEs. They must also be considered against the many years of clean audit opinions given to SOEs when corruption, tender fraud and procurement malfeasance were actually so rife and so material that they could only have been missed by the incompetent, the blinkered or the dishonest.

The ISA require that an auditor, on accepting an appointment, must consider the business and audit risk, and then plan an audit and schedule of work to obtain the necessary evidence to support the audit opinion.

Any capable audit partner taking on the audit of, say, Eskom, SAA or Denel would be alert to the fact that procurement would be one of the most material items on the income statement and/or balance sheet, and that the necessary audit work would be required to mitigate the inherent audit risk associated with such large numbers.

Corruption, tender fraud and procurement malfeasance at SOEs were so rife and so material that they could only have been missed by the incompetent, the blinkered or the dishonest

Firer suggests it is hindsight that has informed us of the malfeasance at SOEs. But his observation flies in the face of the work of investigative journalists who, for the past decade, have reported on the malfeasance at SOEs.

It is unclear how audit firms could have been unaware of this reportage — which leads to the conclusion that they had no understanding of materiality, risk assessment, audit judgment or, to put it quaintly, the “art as opposed to [the] science of auditing”.

SOEs’ annual financial statements include the report of the accounting authority (the directors). Under the PFMA, it is the responsibility of the accounting authority to ensure there is a fully functioning system of internal control and internal audit, and that procurement be conducted in a fair, equitable, transparent, cost-effective and competitive manner.

Unsurprisingly, the accounting authorities’ reports on SOEs consistently confirmed that internal control and internal audit were fully functional, and that procurement was compliant with the PFMA.

This was clearly untrue — but if the auditors had conducted the necessary work, they would have been compelled to express an audit opinion highlighting the false and misleading nature of the accounting authorities’ claims.

Stopping the state-capture game

Had audit firms discharged their duties in compliance with their professional and statutory requirements, they would either have refused the audit appointments at the outset, or accepted the appointments subject to a budget that would have allowed them to conduct additional work in the areas of procurement and internal control.

Conscientious audits would have resulted in audit opinions that were, at best, materially qualified, or, at worst, adverse. These would have made it impossible for lenders, under their own governance requirements, to supply credit lines to SOEs, and the state-capture game would have been over a long time ago.

No, Mr Firer, the state capture commission has not been unreasonable in its assessment of auditors’ complicity in enabling state capture. Rather, it must be asked whether the commission, afforded more time and resources, would have made more damaging findings, and perhaps recommended the criminal investigations of audit firms.

Mantell owns a biscuit factory. He is a former chartered accountant


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