AUDITING PROFESSIONS ACT
Errant auditors face fines of up to R25-million under new legislation
The increased maximum fines are a major change that will likely have a significant impact on the auditing profession in South Africa.
Finance Minister Enoch Godongwana quietly increased the maximum monetary fines for errant auditors and auditing firms last week. While the increase is an eye-watering one and a welcome change, there seems to be contention over the implementation date.
Kim Rew, a partner at Webber Wentzel, says the fines will apply to auditors and auditing firms who have been charged with improper conduct and who admit guilt or are found guilty following a disciplinary hearing.
The new fines are significantly higher, with the maximum fine now at R25-million – 125 times the previous maximum of R200,000.
The Auditing Professions Act of 2005 (APA) empowered the Independent Regulatory Board for Auditors (Irba) to investigate complaints of improper conduct where registered auditors are alleged to have acted contrary to the Irba code of professional conduct or failed to correctly apply auditing standards.
A 2021 amendment to the Act was intended to introduce more effective monetary sanctions after public criticism that the previous fines were too low to have any real impact.
Rew says the Act differentiates between auditors and auditing firms who admit guilt and those who are found guilty following a disciplinary hearing. The new maximum monetary fines which the Irba may impose are:
Admission of guilt:
- R5-million per charge for an individual auditor.
- R15-million per charge for a firm of auditors.
Found guilty following a disciplinary hearing:
- R10-million per charge for an individual auditor.
- R25-million per charge for a firm of auditors.
The proposed increases were published in mid-September last year for public comment and have now been implemented as per the initial proposed increases.
“This begs the question of the effectiveness of any public comments. Webber Wentzel’s view is that there is no express wording or clear implication in the APA which suggests that the increased maximum monetary fines should apply to alleged improper conduct committed before the publication of the Minister’s notice on 15 June 2023,” Rew says.
However, Irba has a different view, saying the fines apply to all improper conduct after the date of promulgation of the amended Act or 26 April 2021.
Imre Nagy, chief executive of Irba, says it is important to note that these are maximum fine limits and not fixed.
“As in the past, the enforcement committee and the disciplinary committee continue to have, within their respective scopes, a variety of other sanctions which may be imposed for improper conduct, including non-monetary sanctions.
“The committees also continue to have the power to scale monetary sanctions in line with the seriousness of the charges, therefore not every charge of improper conduct will attract the maximum fine,” he says.
Irba will now embark on the process of finalising the implementation framework to ensure that relevant considerations (including proportionality) are considered before determining an appropriate fine. The increased maximum fines are a major change that will likely have a significant impact on the auditing profession in South Africa.
It remains to be seen how Irba’s new powers will affect auditors who engage in improper conduct. DM
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A step in the right direction but not enough. A maximum of R25m is too little as these firms make millions in fees. This amount could be budgeted for as bad debt
I agree. The cost of auditing is going to increase as well since they have to cover for the risk of higher fines now. Let us take Tongaat – if the auditors did their job properly, the billions lost would still have been in the pockets of investors, farmers, workers and other stakeholders. Let the auditing firms make up for that loss, since they were accomplices in it. Or jail them. Ie imprisonment without option of a fine for the individual auditor!
“If the auditors did their job properly”
That is the question. These fines are perfectly acceptable when there is a clear corrupt relationship with the auditor, and yes even jail time.
But remember, even a “proper” audit can miss fraud and corruption. An auditor should not be fined or jailed anymore than a police detective who cannot solve a crime.
The nature of these transactions are often phenomenally complex and designed to be hidden.
Good news. But 5 or even 25 mil is little for a large company to pay if their bribed auditor (if the auditor was sharp enough to ensure this guarantee in his corrupt agreement) is caught. I still think we should use AI for working out books and audits and then bring the AI produced reports back to life through associations (of institutions from various levels of public life) to workout the cost or value of an enterprise for the common good.
Fines wont make much difference given the scale of corruption. If we really want to make a difference do things differently. a) Levy listed companies a percentage of turnover as provision for audit – the money gets paid to the Johannesburg Stock Exchange (JSE) and they appoint the auditors on say three year contracts. The auditors then effectively report to the shareholders. b) Unlisted companies have to rotate auditors every three years. c) Probably most important, directors (audit firms and listed companies) bonuses are only paid after five years when profits are sustained.
Yes
Yes, of course this is a good, if insufficient step (fines should be related to the fees received as well as the size of the company audited) but it seems like penalizing the messenger. After all, there seems to be no prosecution of the government officials, big business types on the other side of this equation.
The standards of accountability and compliance in the private sector are raised continually- by the state. But the glaring omission is that the levels of compliance and personal accountability in the public sector continue falling (failing) and nothing is done about it. This is blatant discrimination as both the public and private sectors are serving the same consumers.
Well said Peter, an excellent point not often made.
This is definitely a step in the right direction.
If we can take one bite at a time, the elephant (corruption) will gradually be consumed. Thanks for a good article.
These draconian fines are going to drive people out of the auditing profession which isn’t going to help anyone. There are many easier ways of making a good living without taking such risks. The CEO’s and Directors behind the African Bank, Steinhoff and Tongaat major audit failures remain unpunished to this day, yet they caused the failures, not the auditors who they deliberately misled. Audit firm mandatory rotation also doesn’t help – the chances of Audit failure are much higher in the first years a firm takes them on when the auditors don’t understand the business they’re auditing as well as they would with greater experience on the job.
Agreed! These fines are acceptable if there is a clear corrupt relationship with the auditors, but even then criminal law should deal with the auditor, not IRBA who are not equipped to make decisions regarding fines of this magnitude.
Studies are already showing that audit firm rotation has zero impact on audit quality, and quite right can lead to a decline in audit quality in the first few years. So how is it that The IRBA pushed forward with that decision!
I worry for the profession. Does the regulator really have a full understanding of the various forces that impact on it??
Would not want to be a member of the Audit profession. This will slowly kill the profession and then who will do the auditing. Untoward outcomes.
The IRBA has always sought to carry a big stick yet their actions appear to have had unintended consequences of driving skills away from the profession.
Audit failures will soon start happening simply because those in the profession cannot employ sufficient skills on audits.
This big stick in the absence of dynamic, forward thinking leadership will add further damage to the profession.
This is the most stupid piece of legislation. All it will do is ensure that most accountants are not prepared to do audits. There are thousands of small limited companies who are required to have audited financial statements. Most estate agents and attorneys must have their trust accounts audited. The legislation should only apply to audits of listed companies or companies with a turnover of over, say, R500 million, in other words, substantial companies.IRBA is making a huge mistake.