CAPE TOWN - South Africa’s corporate fraud problem, which has led to shareholders being defrauded and losing significant shareholder value in recent years, may have been prevented if internal auditors had been held to accountability, industry experts said on Wednesday.
Kariem Hoosain, Partner at Mazars South Africa, an audit, tax and advisory firm, said the problem could have been entirely preventable if the internal auditors had been more empowered, protected and held to the same level of accountability as external auditors, via appropriate regulation of the internal audit industry.
“Considering the high profile scandals that have dominated news headlines in the last few years, from VBS Mutual Bank to Eskom, it does not seem unreasonable to say that South Africa may have a corporate fraud problem,” he said.
In recent years, Hoosain said, external auditing firms may have justifiably garnered significant public criticism for missing acts of corporate fraud and accounting irregularities at both listed companies and state-owned entities for extended periods.
“However, there has been little reflection or comment on the role of the internal auditors in these companies and entities. Internal auditors are meant to be an integral part of the ‘comprehensive assurance’ on the financial and operational affairs, which must be provided to shareholders, boards and audit committees of these entities.”
While external audit firms are often accused of negligence for failing to uncover these irregularities much sooner, Hoosain further pointed out that an external auditor was not an adequate measure to combat fraud and corruption.
“External auditors conduct audits on a sample basis while applying a risk-based approach, which is highly effective at detecting unintentional errors and omissions in companies’ financial statements. On the other hand, when executives engage in fraud, they will commit collusion and forgery, and override internal controls in order to evade detection by random sampling. The fact is that external auditors cannot be expected to function as a first line of defence against fraud,” Hoosain said.
Charles Nel, acting chief executive of the Institute of Internal Auditors South Africa (IIA SA). PHOTO: Supplied
He argued that internal auditors should be able to detect these types of practices more effectively than external auditors because they function much more closely with the business and its management.
The lack of regulation also has a negative impact on the quality of skills in the internal audit sector, according to Charles Nel, acting chief executive of the Institute of Internal Auditors South Africa (IIA SA).
“There are currently no regulations or legal requirements that regulate the internal audit profession in South Africa, and internal auditors are not required to have any specific qualification. Quite literally, anyone can practice as an internal auditor in South Africa, and we cannot accurately estimate the number of individuals who are working in the industry at this time.”