THE SHAKE UP: Auditing is really much more than just a box ticking exercise
The representative, a spin doctor, was at pains to explain to me the complexities that govern the auditing profession and the nightmares that auditors go through before signing off on listed companies’ financials.
The lecture about the dialectics of the profession and how simple minds like mine had a tendency to misrepresent what this noble profession stood for, lasted exactly 18 minutes.
It was like an elder passing on some important knowledge to a devious youngling.
The most outstanding thing about it was that it is not for auditors to probe any fictitious entries in the financials.
If the company said that it bought, for example, a pair of socks for one of its likeable executives for R1000, all an auditor needed to see was the proof of payment to ratify the books.
Never mind that such a pair needed to be out of this world to justify the amount. A receipt to prove that the company paid for it would be enough.
The auditor could only put a disclaimer if it was not satisfied about the authenticity of the proof of payment and not the item itself.
Let me state at the outset that I can neither state a claim or expertise in auditing. But to say that the call was as excruciating as it was baffling would not be an overstatement.
I was reminded of the conversation as Steinhoff International prepared to take its shareholders into confidence following a massive scandal that wiped off more than 90percent of its market capitalisation in 2017, and claimed the scalp of the once untouchable former chief executive, Markus Jooste.
Jooste, former chief financial officer Ben la Grange and ex-executives Dirk Schreiber and Stehan Grobler allegedly cooked the books through 6.5billion (R107.94bn) of fictitious transactions to inflate profits and asset value to the tune of more than R100bn between 2009 and 2017.
The near collapse of Steinhoff International cost pension funds and institutional and individual investors billions of rands.
How auditors could have signed off on the financials that included third-party transactions and inflated asset valuations is beyond comprehension.
What we know now is that Jooste was paid a total sum of R5.07million for his last two months at the helm of the troubled retailer.
While this 2018 annual package was way below the amount of R121.82m he received in 2017, it guaranteed him a comfortable lifestyle as his former colleagues battled investors, bankers and regulators to keep the company afloat.
Jooste is today enjoying spectacular views and the tranquillity of the waves of Hermanus.
His only worry is probably the multi-billion rand class-action lawsuits that have been instituted by investors such as Christo Wiese for the losses caused by the share-price crash.
Last week Tongaat Hulett asked the JSE to suspend its trading after financial irregularities revealed that it could have overstated its real value.
The group, which has wide operations in the Southern African Development Community region and an extensive property portfolio, said it was likely to restate its 2018 financials after ongoing strategic and financial review revealed certain practices that would require further examination.
It said the value of its business after liabilities for 2018 had been overstated by between R3.5bn and R4.5bn.
Tongaat’s current market cap is R1.78bn, with liabilities that extend to R14.6bn in 2018. Again this accounting misstep was not picked up by auditors.
Auditing firms in South Africa have failed to protect shareholders from blatant abuse by directors.
Last year the Independent Regulatory Board of Auditors (Irba ) hauled an auditor who allegedly helped a Gupta-owned firm to divert funds earmarked for the Vrede dairy project to foot a multi-million bill for a family wedding. It is a step in the right direction, but is more reactive than a prevention exercise.
We should learn from other countries that have taken initiatives to ensure that these entities, which are paid billions, subscribe to the basic minimums for auditing.
They cannot be allowed to hide behind mere processes instead of doing what they are expected to do.
Last week India moved to ban Deloitte Haskins Sells and KPMG affiliate BSR & Associates for five years, on alleged lapses in their audits of a unit of Infrastructure Leasing & Financial Services (IL&FS), which the government took control of last year.
India’s corporate affairs ministry told a company law tribunal that the companies miserably failed to fulfil their duties as auditors for IL&FS Financial Services.
The Indian government took control of IL&FS in October after it defaulted on several debt obligations, saying it stepped in to insulate the financial system from contagion. The group has a debt of more than 910 billion rupees (R192.62bn).
And India’s central bank barred SR Batliboi & Co, an Ernst & Young firm, from conducting statutory audit assignments in commercial banks until April 2020, citing lapses identified in its work.
In the UK, PricewaterhouseCoopers was fined £4.55m (R84.66m) by the country’s accounting watchdog over failings in its handling of technology firm Redcentric, giving fresh ammunition to critics calling for a breakup of the so-called Big Four auditing firms.
The penalty was reduced from £6.5m after the company admitted its wrongdoing ahead of a final decision by the Financial Reporting Council.
This should be a lesson for the Irba and the government that these firms cannot be a law unto themselves.
The auditing process should not only be done to protect shareholders from unscrupulous and greedy executives, it should also be done to protect the integrity of the profession itself. Auditing is much more than a box ticking exercise.
Despite what spin doctors would have us believe, auditors are also susceptible to the malady of greed and manipulation.