The unfortunate persistence of accounting and auditing scandals in South Africa has led to a need for the profession to face up to its flaws and determine how it will restore trust by engaging with business leaders.
While accounting scandals in South Africa are not unheard of, it is the scale of the underlying rand amount that is most alarming. The Masterbond Group scandal that led to the imprisonment of three of its directors in 1995 for fraud in excess of R170 million highlighted the need for a review of accounting and auditing practices[i]. This review became the Nel Commission of Inquiry which in 2001 indicated the need for greater protection for investors and greater oversight into the relationship between auditors and management.
In 2000 LeisureNet, the controlling company of the Health and Racquet Club, went into liquidation and its two joint chief executives were imprisoned. At the time of its liquidation the company had in excess of R1.2 billion in liabilities and approximately R302 million in assets[iii].
In late 2017 the Steinhoff scandal broke, and while the fallout still needs to be properly calculated, it is clear that a failure in auditing oversight has played a role in the scale of the fraud committed.
The Independent Regulatory Board for Auditors (IRBA) announced in April 2018 that it was investigating KPMG over its audit of VBS Mutual Bank as there are concerns that the formal external auditing process was not followed[iv].
South Africa is not the only country where fraud and accounting irregularities have not been picked up by major auditing firms. Crises such as the Enron scandal in 2001, which led to the voluntary withdrawal of Arthur Andersen’s accounting licence to practice as a Certified Public Accountant, have impacted the industry negatively in the United States.
In the United Kingdom there have been calls to probe and break up the dominance of the ‘Big 4’ accounting firms – EY, KPMG, Deloitte, PwC – following the collapse of Carillion, a UK government contractor in January 2018[v]. The UK chairman of KPMG is on record as saying that the audit market is an oligopoly in that country, while a UK parliamentary report accused the ‘Big 4’ of having too close of a relationship with businesses and thus being unable to provide the impartial and independent auditing reports required.
The net result is that the accounting profession, and auditing in particular, are faced with a major trust deficit that is harming the industry. In order to overcome these hurdles and restore confidence in the profession sweeping changes may need to be made. To help determine the changes needed SAIBA called for a roundtable discussion with business leaders, thought leaders, and persons of prominence in South Africa, during its AGM in Johannesburg on 31 May.
The purpose of the roundtable was to discuss 3 key concerns: the state of the accounting and auditing profession in South Africa, the likely causes of the current crises, what needs to be done address the current crises.
The root cause seems to stem from greed and corruption, and systemic changes are not the only requirement to restore trust[vi]. The auditing profession is a lucrative business and many companies fear the potential loss of a client by providing honest auditing results more than the ethical dilemma of placing the profession above the potential business.
Some of the key concerns raised by Nicolaas van Wyk, CEO of SAIBA at a recent round table put forward by the oranisation, include the lack of overseas auditing firms having a presence in South Africa as well as the lack of transparency among accounting firms compared to the disclosures they are required to make in other countries. Of great concern for van Wyk is the number of regulatory bodies governing various disciplines within the accounting profession in South Africa which leads to the question of who is actually regulating the profession as a whole
A key area of concern is the lack of access and opportunity for auditors to gain the experience necessary to provide the high-level auditing required. In South Africa there are 4 500 qualified auditors across more than 2 000 auditing firms, however it is evident that the lions share of auditing and consulting work is going to a select number of firms.[viii] A common complaint is that auditors do not have sufficient experience, however if only a handful of firms conduct the majority of audits, it is not possible for the majority of qualified auditors to gain the required experience. A proposal suggested at the round table was for the mandatory rotation of audit firms. The intention here is to assure independence and reduce the desire to hide potentially damaging results in order to remain the auditor of choice. In order to ensure that smaller firms benefit from any changes, a commission of inquiry into competition amongst the top firms is needed.
There is no doubt that with the number of investigations into accounting irregularities there will in all likelihood be significant interventions by government. In order to restore trust in the profession these changes need to benefit businesses and citizens alike with a greater focus on transparency. A new regulatory framework may be needed to create this transparency and ensure that auditing firms maintain their independence and unbiased auditing practice. It is of great importance that bodies such as IRBA and SAIBA work together to ensure that audit firms are performing to the required acceptable standards.