CAPE TOWN - As the country watches the Independent Regulatory Board for Auditors’ (Irba’s) investigation into the questionable conduct and performance of KPMG South Africa, it would be naive to believe that KPMG is just a delinquent outlier in a fairy tale audit environment of compliance and probity.
There are many other large audit firms which are equally guilty of significant breaches of the Audit Professions Act, with respect to their professional work on behalf of state-owned entities (SOEs).
The fact that the Irba has repeatedly put South Africa as number 1 in the world over seven consecutive years, for auditing standards and reporting, raises more questions than answers about the mythical ranking.
As home truths become ever more apparent, the Irba seems to have added further fuel to the fire with its proactive media releases, giving the impression of a regulator at the top of its game. Further analysis of the number 1 audit ranking, and the efficacy and the modus operandi of the Irba , is required to establish whether South African auditing is indeed as good as claimed and whether the Irba is in fact firing on all cylinders.
If auditing is about the science of numbers and hard evidence, then the Irba needs to take us into its confidence as to how and why it has perpetuated the myth that South Africa has been ranked number 1 in the world for auditing and reporting standards for seven consecutive years when it is apparent that there is no independent verifiable data and methodology to support this claim. The World Economic Forum (WEF) collates information each year for what is known as its Global Competitiveness Index (GCI), comprising 114 indicators which are grouped into 12 pillars - with a sub-section being auditing standards and reporting.
The computation of the GCI is based on some statistical data collected, but scoring for 80 of the 114 indicators is derived from a qualitative “Executive Opinion Survey” conducted by the WEF.
It appears that executives are asked questions and then provide scores from 1, extremely weak, to 7, extremely strong - which are consolidated into a scorecard resulting in a “ranking.”
Quite unbelievably, the sample of executives for South Africa is less than 100 business leaders per annum and the questions are based purely on perception as opposed to hard facts.
Standards not explained
The WEF does not explain what auditing and reporting standards are and it has been independently confirmed that it is “generally understood to refer to auditing standards adopted by auditors and the financial reporting standards which entities are required to use in preparing financial statements.”
What is quite clear is that this “perception” ranking has nothing to do with the inspection of physical audit work of registered auditors and whether it conforms to auditing standards. The survey and ranking appears to have no scientific or evidential basis.
In simple language, it is a ranking of no value and the Irba, for reasons best known to itself, has continued to communicate what appears to be a “fake good news” story. And what about the perception of an aggressive regulator firing on all cylinders ensuring accountability of registered auditors. Will the Irba’s performance, like the world ranking, wilt under closer scrutiny?
The regulator’s performance must be measured against its statutory responsibilities which includes the mandatory and frequently required inspection of the design and implementation of audit firms’ systems of quality control as well as compliance with the relevant professional standards. In other words, the Irba is required to be proactive in this process and by way of example.
One is tempted to ask whether the Irba should not of its own volition have identified qualitative weaknesses at KMPG years ago when continual reportage highlighted concerns about the Sars report and the Gupta group companies?
If the Irba’s lack of energy in the proactive identification of problems at audit firms is cause for concern, then its investigation and disciplinary process ask even more questions, best illustrated in its management of complaints from third parties where the indications are of an investigative process hardly predisposed towards any great sense of urgency.
During the course of an investigation the investigations committee can, if there is evidence of improper conduct, reach an agreement which involves an admission of guilt and a fine ranging from between R10000 to R200000 per charge, which represents even less than a slap on the wrist for a large firm.
The convenient rider to the “plea bargain” arrangement is that the findings are published in what are known as “general terms,” meaning that firms and individual auditors are not named.
It is quite evident that the Irba does not have the necessary manpower or financial resources to tackle major audit firms with large legal budgets, and for this reason, the regulator will aim to obtain a plea bargain wherever possible. As with the publishing in general terms, another curious arrangement is that the all-important charge sheet which is eventually agreed to between the Irba and the respondent is kept secret from the complainant.
This raises serious concerns over lack of transparency and raises the legitimate question of whether the respondent was correctly charged in the first place?
While the Irba has the power to de-register audit firms and it might well do so with small firms, the question remains whether it has the stomach to take on large firms. There are hard questions which need to be asked of the Irba and of our legislators.
These include - but are not limited to:
- Why have there been persistent misrepresentation of our audit capabilities when it is quite apparent that these “world rankings” are not based on substantive evidence?
- Why has the Irba not identified previous non-compliance issues at KPMG on its regular inspections?
- If compliance issues at KPMG for example were detected, then what action, if any, was taken?
- If one accepts that justice must be seen to be done, then how can the Irba think that anyone will have faith in a process where charge sheets are removed from public scrutiny and when plea bargains are finalised in shrouds of secrecy?
- Does the Irba or Parliament really believe that insignificant fines and secrecy are deterrents to audit firms or would fines akin to those provided for in the Competition Act not be far more suitable?
- Does the Irba, based on its current performance and disciplinary regime, believe that it takes appropriate action on improper conduct?
- Does the Irba really believe that its management of the audit profession is achieving the objective of maintaining accountability and public confidence in the profession?
- Does Parliament believe that the Irba is performing satisfactorily?
It would appear that those auditing SOEs have adopted a supine approach and by doing so, this procedure has become part of the state capture project. That all of this has occurred before the Irba’s very eyes is of serious concern.
For a profession which has traditionally set such high standards, one hopes that the public and media will demand nothing less than optimal performance. Such can also be expected if the Irba and Parliament do their duties in such a way that confidence can be restored in what is a vital profession.
Simon Mantell runs the biscuit factory Mantelli’s based in Cape Town.
- BUSINESS REPORT