Bernard Agulhas, CEO of the Independent Regulatory Board for Auditors (IRBA), says recent proposed amendments to the Auditing Profession Act go a long way to strengthening the audit profession by imposing tougher penalties and allowing easier disciplinary processes, including subpoena powers.
Post-1994, South Africa experienced one of the longest periods of positive economic growth in the country’s history. The Minister of Finance at the time had adopted the recommendations of the 2003 World Bank Report on the Observance of Standards and Codes (ROSC) for accounting and auditing. The report suggested that government focus on strengthening the enforcement mechanisms for ensuring compliance with established accounting and auditing requirements by “establishing an independent oversight body, consisting of eminent persons, and restructuring the statutory regulator of the auditing profession under an effective governance structure and with broader mandate for efficiently regulating the profession.”
Until then, the profession was governed by the Public Accountants and Auditors Board (PAAB) under a regime of self-regulation with limited powers. Essentially, this meant that there was insufficient independence of the regulator from those whom they regulated, which manifested in provisions which required practicing auditors to be members of the board of the PAAB, the governing body. In 2005, South Africa became one of the first countries worldwide to adopt International Standards on Auditing (ISA) and the Independent Regulatory Board for Auditors (IRBA) was created under the APA, creating a statutory oversight board for which the maximum number of auditors on the board was prescribed (no more than 40%), with powers to lay down regulations and set standards.
In 2008, the IRBA became one of the founding members of the International Forum of Independent Audit Regulators, a forum which shares best practices in regulation and which has a mission to strengthen global audit quality. One of the requirements to become a member of IFIAR is that the audit regulator must be completely independent of the auditing profession.
As a public entity, IRBA reports to the Minister of Finance and its independent board is appointed by the minister. It is charged with oversight of auditors in the interest of public protection and through its Act has disciplinary powers to hold auditors accountable for non-compliance to the Code of Professional Conduct and the ISA. It guards the independence of its board and committees by limiting the involvement of practicing auditors in these structures.
Over the years, the IRBA has continued to make improvements to regulation within its mandate. The auditor’s report has been improved and includes more disclosures than before for the benefit of investors. In 2015, mandatory disclosure of the audit tenure of the audit firm with the client was required as a part of the independent auditor’s report. This was to highlight potential familiarity threats for investors that could lead to independence issues which could, in turn, impact on the reliability and credibility of the audit opinion on the financial statements.
Further improvements were made to strengthen the IRBA’s inspections and investigations departments based on the recommendations of the World Bank’s 2013 ROSC. However, deficiencies in audit quality concerned the Board, which required that more should be done to the protect the public, safeguard auditor independence, improve the quality of audit and enhance trust in the credibility of audit opinions. In 2017, the Board prescribed that from 2023, Mandatory Audit Firm Rotation would be required every ten years.
This progressive implementation of standards, regulations and guidelines is a necessary role of effective regulators worldwide in support of continuous improvement and the creation of public trust. Recently, it became evident that the public expected more of the IRBA than the APA prescribed or allowed, specifically considering the recent audit and accounting failures. The limit to monetary sanctions and the speed of bringing auditors to account were key among these. The Act Amendment process was subsequently fast-tracked and submitted to National Treasury in December 2017. It includes several changes which will address not only the low level of fines, but others which will either remove restrictions to obtain critical information for investigations, as well as further strengthen the independence of the IRBA.
The amendments apply mostly to the investigation and disciplinary process. These amendments will provide the IRBA with subpoena powers in the investigation process, simplify the disciplinary hearing process, and provide the Minister of Finance with power to determine maximum fines, currently limited by the audit legislation to R 200 000 per offence.
The ability to subpoena will ensure that the IRBA has immediate access to all the evidence and audit files it requires to complete an investigation more speedily, even where information is being withheld. This will shorten the duration of investigations which previously have been delayed by non-cooperation from audit firms.
The disciplinary process has also been simplified, without infringing on the rights of any of the parties, by removing many of the burdensome legal practices which meant that disciplinary matters have been heard in a manner similar to that of a high court, making them unnecessarily lengthy and costly.
Giving the Minister of Finance discretion to determine the upper limit of fines, means that sanctions handed down on guilty auditors and their firms can be increased beyond the previous R200 000 limit per charge. The Minister of Finance has not indicated what level of fine he would prescribe. It is likely to be significantly more than the current limit, so this will provide a more effective deterrent to unethical behaviour.
In dealing with constraints, the amendments propose removing limits to the size of the disciplinary committee, allowing the IRBA to appoint as many members as it determines, which will allow the IRBA to call on additional resources when there is any substantial increase in the number of matters to be considered. Currently, the limited number of committee members, often further limited by the exclusion of members who may have a conflict of interest and availability of members, has a negative impact on the speed at which matters can be heard.
Given the IRBA’s focus on public protection, and the fact that some of the investigations and matters referred to IRBA are issues that do not relate to public interest entities (PIEs), an amendment to allow the IRBA to refer non-PIE matters to another relevant body, will ensure that IRBA can focus on public interest matters. This will improve the utilisation of limited resources for matters in the public interest. This body is currently accredited by the IRBA, meaning that the IRBA will still have oversight over the manner in which the processes are run by the accredited body.
The amendments to the APA are likely to have a major impact on the way in which auditors approach their work, quality and ethics. Therefore, we expect a positive impact on behaviour, and increased focus on audit quality and ethics by auditors.
However, the amendments on their own will not prevent corporate malfeasance, fraud or future scandals, as business failures can be caused by complex internal fraud and corruption by directors or employees. Until the whole financial reporting eco-system is regulated, which was also included among the recommendations in the 2013 World Bank ROSC, there will continue to be opportunity for such malfeasance to exist and possibly go unpunished. However, when it comes to the fourth ‘line of defence’, external audit, we believe that greater powers will enable the IRBA to act more swiftly in identifying, investigating and disciplining errant auditors, and hand down punishment more appropriate to the nature of the transgression.
The proposed changes can only bode well for the IRBA to deliver effectively and efficiently on its mandate, which must then ultimately be in the best interest of the public and investors and support the IRBA in responding to stakeholder expectations.