Exclusive: IRBA CEO on new fines, future of MAFR, and comprehensive regulation
It’s been a busy year for IRBA, with MAFR, new fine limits, and a new audit pathway. CEO, Imre Nagy shares his perspective on what some see as controversial changes.
IRBA won’t appeal MAFR judgement, but instead focus on writing the measure into law.
Firms who choose not to rotate, do so at their own peril, says IRBA CEO.
IRBA is working on a framework for the newly gazetted fine limits. It may be published for comment.
The way Imre Nagy, CEO of the Independent Regulatory Body for Auditors (IRBA), frames the regulators’ last year is that the reforms instituted as far back as 2017 are starting to pay off. To bear fruit.
To go along with this metaphor, the audit tree traditionally perceived as noble and sturdy has faced severe storms and a beetle infestation in the form of Steinhoff and State Capture over the preceding decade.
IRBA, as the regulator, came in for critique. Now despite industry pushback, Nagy can point to reforms. “I think we've accomplished a lot. I'm not taking the credit for it as a CEO, but I am somebody that likes to see fruits.”
Objects dangling from the tree include the gazetting of significantly higher fine maximums; mandatory audit firm rotation (MAFR) which (briefly) took effect and most firms complied ahead of implementation; and introducing a new audit pathway, which we’ve covered here.
In order for these fruits to bud, blossom and ripen, branches had to be cut, leaves were ruffled. “We've been called the toothless regulator and on the very same day called draconian.”
It will all be fines
The gazetting of new fines shook a few branches. Up to R5 million per charge for individuals if they plead guilty, rising to a maximum of R10 million if they oppose the charge and are subsequently found guilty. For companies, these maximums are R15 million and R25 million.
Previously fines were limited to R200 000 per conduct charge for individuals and firms. Paltry in comparison to the damage a dodgy audit could wreak. The new fines have created angst among some auditors, perceiving that they may be on the line for millions even if mistakes are relatively small.
“I think we have to do some work to address the perception, first of all, that these are maximum fines. That under R5 million there could be a whole range,” says Nagy.
“Remember why we increased the fines. It's to really address the big failures. So if somebody missed something on a file, I mean really we won't be unfair. If I'm a small firm, with a R5 million turnover, it wouldn't make sense to fine R5 million and take them out of work, and take all their trainees out of work. That’s not the intention.”
Nagy says IRBA is earnestly working on a framework around the new fines so that there is consistency and proportionality. “We’re considering whether we should actually publish it for comment.”
Nagy says the real financial liability firms face is for civil suits which can run into astronomical amounts. Deloitte for instance agreed to a R150 million settlement with Eskom and R1.3 billion to claimants suing Steinhoff.
Nagy questions the rationale behind some of the adverse reactions.
“Auditors are saying that the audit fees will go up. Now, you can approach this from different angles, meaning, have you done a substandard audit in the past knowing you could get slapped [with a fine] and pay that with your credit card? Or are you now saying, ‘I need to do more work to get my quality [up].’ Isn't that a good thing for the profession?”
Mandatory audit firm rotation: When life gives you lemons…
MAFR is a long-term IRBA project, which limits audit firm tenure to ten years for public interest companies. Historically, many of these companies have kept the same audit firms for decades.
In 2017, IRBA instituted MAFR despite industry resistance, with a deadline of April 1 2023, set for firms to comply. More than 90 percent of eligible firms rotated ahead of this deadline. However, the Supreme Court of Appeal struck down the measure two months later, finding that IRBA acted outside of its powers.
Despite this setback, Nagy is sanguine and is set on a new approach. For one, most firms have already rotated. Secondly, another avenue is open. “We have a lot of support for legislating MAFR, I'm not concerned about it. We don’t have the appetite to take the judgement on review,” says Nagy.
He argues that the lengthy appeals process to exhaust could be better spent writing MAFR into legislation. “We have a way to address the issue in the next 12 to 24 months with the support of parliament, parliamentary committees, political parties, and the National Treasury. In fact, we've been accused of a power grab, but it's not true because Treasury has been told long before the judgement came out to legislate MAFR into our Act in the next round of amendments.”
Nagy’s perception is that most investors and the media are on his side.
“I'm going even so far as to say to firms and audit committees who choose not to rotate, that they're doing so at their peril. Should something go wrong on those audits, and you and you go check, and see they’ve had the same auditors for 56 years, they have a reputational risk. The media will immediately jump and say, ‘you see, this is one of the reasons’.”
The harvests to come
Nagy says that IRBA would like to change legislation at some point so that it’s able to make its inspection reports public.
In addition, Nagy says, “We’re issuing a couple of rules in the next few months that if the company didn't disclose non-assurance fees to an assurance client, the auditor must. We want to give transparency to investors to see if you have an independent auditor doing all sorts of other work, those are alarm bells going off.”
One of IRBA’s ambitious projects is to plug gaps in the broader ecosystem. Gaps under consideration include the regulation of registered accounting bodies, an idea that polled well during a recent IRBA stakeholder event.
“There’s another solution. You get CEOs and CFOs that will resign as CAs, then they're not accountable. What I'm hearing [from stakeholders] is that it's one thing to regulate accountants, but we need to actually professionalise key positions.”
Nagy knows much of this work is outside of IRBA’s traditional ambit. But his view is that if the garden is a fire hazard, it doesn’t help if he only focuses on his patch.
Other ideas include a legally backed and regulated corporate governance code and increasing collaboration with other bodies. Nagy says this is already happening and says they’re working hand in glove with the Auditor General.
Will these measures, and those already implemented prevent future audit failures and restore confidence in the profession? Are these fruits not only edible but fortifying against future sickness?
Time will tell. However, unlike other bodies blighted by State Capture, IRBA can point to solid examples of how it’s straining to react, reform and reinforce.
