Home Accounting and Auditing Regulator may get more muscle to crack down on auditors

Regulator may get more muscle to crack down on auditors

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Amendments to the law governing the auditing profession could give the regulator powers enjoyed by select law-enforcement agencies, says Business Day.

The bill which the National Treasury introduced to parliament had striking changes compared with the one published in August 2018.  It is proposed to give the Independent Regulatory Board for Auditors (IRBA) the  power to enter and search premises when investigating auditors for improper conduct.

Nicolaas van Wyk, CEO of SA Institute of Business Accountants (Saiba), supports the search and seizure powers, as these are similar to the powers given to SA Revenue Services (Sars) and the Financial Sector Conduct Authority (FSCA). Speaking on CFO Talks this week, van Wyk says the proposed new powers must be subject to judicial oversight, as they can end up being abused. However, this does not address the real underlying cause of deteriorating public trust in the audit profession. “As long as the auditor is being paid by the client company being audited, how much independence can you expect the auditor to have? A better solution for the audit profession is not to have companies chose their own auditors, but to have them assigned by an independent body set up precisely for the purpose of guaranteeing independence. Rather than companies paying the auditor, they would be paid by the independent body that would be funded from levies charged to the companies. This is not a new idea. It was recommended nearly 20 years ago by two researchers who looked at better ways of establishing audit independence.”

Van Wyk says major corporate scandals come by roughly every decade. In the 1990s it was the Masterbond scandal, and the amount involved was about R600 million. Then a decade later came the Leisurenet scandal, and the amount involved there was R1,2 billion. Then came Steinhoff, and the amount involved is hundreds of billions.

Every time we have one of these scandals, the accounting profession goes through a ritual bout of chest beating with promises to clean up its act. A few accountants are thrown to the wolves as a sacrifice to save the rest of the pack, but the pack remains largely intact. There is talk of tougher legislation, but the incentive to turn a blind eye to corporate malfeasance will remain so long as the auditor is paid by the client company. “One way to remove this incentive and restore trust in the audit profession is for companies to be assigned auditors by an independent body,” says van Wyk.

Business Day reports that the first draft it was proposed only to give the IRBA powers to subpoena any person with information required to complete an investigation. This,  the Treasury said, was due to auditing firms not co-operating when the IRBA investigates auditors. The new proposed amendment followed public consultation which started in 2018.

IRBA CEO Bernard Agulhas said the regulator experienced difficulties in gathering the evidence, audit files and correspondence it required for its investigations. “This led to the investigations being lengthy due to unnecessary delays,” he said.

Agulhas said it was the National Treasury that proposed giving the IRBA power to search and seize evidence. He said the regulator requested only subpoena powers. 

In the 2017/2018 financial year, the IRBA initiated 112 new investigations and only 60 cases were finalised. High-profile cases investigated by the regulator include two Deloitte partners who were in charge of African Bank audits before its 2014 collapse. They still face disciplinary hearings.

The IRBA also finalised the investigation and disciplinary hearing of a former KPMG partner who was responsible for the audits of Linkway Trading last year. It is now investigating another KPMG partner who was the lead auditor for VBS Mutual Bank.

“The proposed amendments will go a long way in rebuilding the public trust. The amendments come at a critical time when attempts to regain confidence from the public and investors, and the prevention of further losses of hard-earned savings can no longer be compromised,” said Agulhas.

But the provision to search premises and seize evidence is not sitting well with auditors. One auditor who did not want to be named said the amendments sought to give the regulator more power than warranted.

Deloitte said it supported any effort to improve the regulatory and oversight framework. However, the auditing firm said in its submission that it raised issues of concern as the powers to search would affect not only auditors but third parties as well. “But it if it is believed that search and entry is needed we have made extensive recommendations to ensure a fair constitutional process,” Deloitte said in an emailed response.

The company said  that a more comprehensive oversight framework that went a step further than the proposed amendments to include those who prepared financial statements and those charged with governance was needed.

Other auditing firms approached by Business Day did not want to comment or share their submissions.

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