One evening in June, most South Africans were glued to their TVs when the news headlines were once again dominated by another accounting and auditing scandal.
ENCA reported that the Financial Reporting Council (FRC), which regulates UK auditors, accountants and actuaries, had issued an extraordinary warning that KPMG’s audit work was of an unacceptable standard and the firm would face increased scrutiny.
The UK regulator’s renewed vigour came after UK parliamentarians repeatedly complained that lax accounting had contributed to some of Britain’s biggest corporate scandals, the TV channel reported.
In addition to anger at the regulator, which faces an independent review of its effectiveness, there was open speculation in the UK Parliament about breaking up the big four audit firms to increase competition and improve standards, the news broadcaster said.
The Daily Dispatch reported that on June 18 the FRC said auditors at KPMG did not challenge management enough, were not sufficiently sceptical and were inconsistent in their execution of auditing.
To address the poor performance, the regulator would increase the number of KPMG audits it inspects in the current financial year by 25%.
It is my observation that South Africa is faced with similar circumstances as that of the UK, wherein corporate scandals have become the order of the day. One has heard about scandals at VBS Mutual Bank, Steinhoff and McKinsey, just to mention a few.
It is becoming a concern that such scandals are occurring under the nose of auditors who should be giving assurance on the accuracy and reliability of financial records of these corporations.
South Africa has its own auditing watchdog, the Independent Regulatory Board for Auditors (Irba), a statutory body established in terms of the Auditing Profession Act with an obligation to protect the investing public by regulating auditors through setting, monitoring and enforcing high quality auditing standards and ethical behaviour.
If Irba has such a powerful mandate, why is it the order of the day to hear about corporate scandals?
Does Irba fulfil its primary objective to protect the investing public?
Owing to the mismanagement at VBS Mutual Bank, investors and depositors could lose millions of rands.
Fortunately, the SA Reserve Bank has secured a guarantee from National Treasury for retail deposits of up to R100 000 per depositor.
The intervention of the National Treasury and the Reserve Bank are applauded in this regard.
In December last year, Irba said it had started an investigation into Deloitte SA following the share price collapse of Steinhoff and allegations of accounting irregularities.
According to Fin24, Irba, however, indicated that before it could finalise its investigation it would wait for two processes to be completed – Steinhoff’s restated audit results for last year, and the results of an independent forensic review into the retail holding company by PwC.
While it is understandable that the watchdog should wait for the two processes to be finalised, one wonders if there were no red flags when it conducted its firm and audit inspections.
Are there no proactive methods to detect cases of non-compliance? Is Irba effective?
Perhaps our Parliament needs to review the effectiveness of our auditing watchdog.
Accounting and auditing regulators across the world need to be vigorous in their inspection and in dealing with the firms that have been found to have put the well-respected profession into disrepute.
It just cannot be business as usual for the local auditing watchdog.
* Kwaza is internal audit general manager at Amathole District Municipality. He is writing is his personal capacity.