After the Bell: The unintended consequences of harsher sanctions for the audit profession
I am going to stick my neck out by declaring that I like accountants and enjoy their company. I do not find them boring despite the countless jokes made about their personalities being dry and highly clinical. Give them the space to talk about numbers, reporting standards, and dizzying jargon. And you’ll see their personality start to glow.
My favourite season — besides the usually balmy Joburg winter — is exams that prospective chartered accountants have to take and pass to receive the coveted CA (SA) qualification. I’m close to this season because we have an aspirant CA in my family, who recently took the first of two exams to test his competency and technical knowledge. Allow me to brag; he passed with flying colours.
I recently asked him about his career ambitions within the accountancy profession, and I didn’t wait long for an answer. “Not a career in auditing,” he said with vigour. He went on: “Auditors are under immense pressure and scrutiny. There is no room for mistakes and learning from them. You’re immediately sanctioned.”
Well, he is kind of right.
The scrutiny of auditors and their work has intensified as Finance Minister Enoch Godongwana announced a few days ago that fines will be increased for auditors and audit firms found guilty of misconduct. The Independent Regulatory Board for Auditors (Irba), is an industry body that governs SA’s audit profession and is tasked with imposing sanctions on errant auditors and auditing firms. Before Godongwana’s intervention, Irba was, by law, limited to imposing a maximum fine of R200,000 per charge of misconduct — whether for an individual auditor or audit firm. Irba, which lobbied hard for an increase in fines, argued that it was a slap on the wrist for the enormous damage that audit failures can cause. After all, R200,000 is chump change for top auditing firms, such as KPMG, Deloitte, PwC, and EY. They have high-paying companies as clients and could admit wrongdoing, easily pay a fine, and glibly move on.
Irba has got its way and can slap errant auditors and their employers with fines running into millions of rand. Irba can now fine an individual auditor R5-million if they admit guilt after a misconduct charge, whereas an audit firm that admits guilt in a misconduct case can be fined R15-million. Should an individual auditor not admit guilt but be subsequently found guilty in a disciplinary hearing, a fine of R10-million can be imposed, while an audit firm found guilty of misconduct following a formal hearing can be fined up to R25-million.
On top of these fines, Irba can impose non-monetary sanctions, with its most severe being the cancellation of an auditor’s registration and their name being removed from the register of auditors in SA. This would effectively bar them from practising as an auditor — permanently.
Auditing scandals in recent years have led to increased scrutiny on auditors, and punishments for their wrongdoing. And there are many scandals! Deloitte missed red flags in its audit of African Bank’s financial statements before it went bankrupt in 2014, almost causing systemic risk to SA’s financial system. For years, Deloitte’s audit partners presented African Bank’s audited financial statements favourably, despite there being many glaring problems. Deloitte was also the auditor of Steinhoff and Tongaat Hulett at a time when both companies were involved in the alleged fraud that cost investors hundreds of billions of rands. Investors rely on audits to inform their investment decisions. KPMG was also found wanting in its audit of Gupta family-owned companies, often turning a blind eye to blatant wrongdoing (State Capture corruption). And there are many other cases of audit failures that don’t grab media headlines.
It is hard to say whether imposing fines worth millions of rands will deter bad behaviour among auditors, or whether we might even see fewer audit failures. Social psychologists globally are yet to make definitive findings in this area involving corporate firms. In crime, some psychologists have found that harsher punishments, such as longer prison sentences, not only do not prevent crime but make it more likely that people are going to re-offend.
But fines will likely send shivers in the corridors of auditing firms. The unintended consequence of more scrutiny and sanctions is that more people might view the auditing profession as being too risky. For those already senior in the profession, such as audit partners or those with their firms, the insurance they take up to protect themselves from personal losses if they are sued/sanctioned, as a result of carrying out audit functions, will probably become more expensive.
Increased fines will also probably make auditing a less desirable profession to follow as my aspiring CA family member has confirmed. The auditing profession is already battling to attract new entrants. Irba has seen a steady decline in the number of registered auditors in SA over the past four years. In 2019, there were 4,079 auditors, which reduced to 3,903 in 2020, then lowered further to 3,630 in 2021, and increased marginally to 3,634 in 2022. Irba has blamed increased scrutiny as one of the reasons for the declining auditor numbers.
I prefer a culture change in reforming the audit profession. Auditors must be encouraged to exercise a large degree of professional scepticism, independence, and objectivity when carrying out their audit work; they need to constantly examine their relationship with clients so that they are not easily influenced to change adverse audit outcomes; and increase documentation and record-keeping that informs every audit finding. (You’d be surprised that many auditors are not good at this, and often land in trouble if there’s no evidence). These are a few recommendations. There are probably other good ones that can be suggested. After all, I am not an auditor, just a novice observer of the profession.