Imre Nagy, who was appointed nearly a year ago as CEO of SA’s auditing regulator, believes that the industry is in a better place than it was five years ago when there was a cascade of audit scandals.

“We went into a dark period. Audit failures started to hit us in 2017. It was like we were in the firing line and the bullets kept hitting us. It was a wake-up call for everyone,” Nagy, who heads the Independent Regulatory Board for Auditors (Irba), tells Daily Maverick. 

On the surface, everything in the auditing industry looked rosy, with a high level of confidence and trust in the profession for many years. Up until 2016, SA held the title for seven years as the world’s number one for auditing and reporting standards. But that changed when audit failures started to pile up.

KPMG missed many red flags in its audit of Gupta family-owned companies, which were the source of State Capture corruption. KPMG was also the auditor of VBS Bank before it collapsed. And there were epic blunders at PwC, which audited the books of SAA. Deloitte audited the books of Steinhoff and Tongaat Hullett for many years before their implosion. 

“We had seen signs that all was not right, through complaints we’d get and the findings from our inspections of audit firms. The way the system was designed was no longer working. Our financial reporting lines of defence weren’t geared for such a systemic failure. We’d just assumed that auditors would act with integrity and due care. We had become complacent,” says Nagy. 

Steinhoff, Tongaat investigations

It’s time for real consequences for wrongdoing to restore credibility to the auditing profession, he says.  

There have been growing calls for consequences in investor circles around Steinhoff and Tongaat, whose failures caused shareholders to lose billions of rands. The only modicum of accountability Deloitte has faced was the firm being forced to pay “settlements” to Steinhoff (R1.3-billion) and Tongaat (R260-million) for the audit failures — though Deloitte claimed this was “not in any way an admission of any liability”. 

Irba’s investigations into the audit failures at Steinhoff and Tongaat are in the “final stages” of completion. Nagy hopes to have it wrapped up by the end of this year so that disciplinary action can be instituted. 

There are frustrations that Irba’s investigations are taking too long to conclude, which Nagy admits is a problem. After all, Irba’s probe into Steinhoff and Tongaat is still ongoing, even though auditing transgressions were made public more than four years earlier in both cases. 

It took Irba until 2018 to finalise its case against Deloitte over its audit failures at African Bank, even though the bank collapsed in 2013.

Nagy says investigations involving high-profile audit firms are often complex, leading to delays in reaching the disciplinary action stage. And the firms usually spare no expense in hiring lawyers to frustrate Irba, which is funded by the government and contributions from the industry, but has limited financial resources. 

“This is why I believe the auditing industry is not out of the woods. But we have turned the tide. We are on the upswing of responding to what has happened.”

Reforming the industry through increased fines

In reforming the industry, Nagy has largely focused on legislative changes aimed at giving Irba more teeth and rule changes that seek to strengthen the independence of auditors. 

Nagy, a registered auditor himself who has worked for PwC and Gobodo (known today as SNG Grant Thornton), is an Irba insider. 

He has been with the regulator since 2013 and acted in the CEO post from February 2021 for 18 months after the sudden departure of Jenitha John, whose appointment as CEO was controversial because she chaired Tongaat Hulett’s audit and compliance committee when financial reporting of irregularities took place at the company. 

Nagy was permanently appointed as CEO in September 2022. 

Irba got a boost last month when finance minister Enoch Godongwana, who oversees Irba’s governance affairs, substantially increased the amount that dodgy auditors and their firms could be fined for audit failures. 

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 can now fine an individual auditor R5-million if they admit guilt on a misconduct charge, whereas an audit firm that admits guilt in a misconduct case can be fined R15-million. And if a case goes to Irba’s disciplinary process (after not admitting guilt), auditors can be fined as much as R10-million and firms up to R25-million.

“What we wanted to do was elevate the consequences for everyone when there is improper conduct,” says Nagy. 

Irba, which lobbied hard for an increase in fines, argued that fines in SA were low and a slap on the wrist given the enormous damage audit failures can cause. After all, R200,000 is a chump change for top auditing firms such as KPMG, Deloitte, PwC and EY.

Fines are high in other jurisdictions. In Australia, individual auditors can face fines of up to A$200,000 (R2.4-million) and A$1-million for firms. Individual auditors in the US could face fines of $100,000 (about R1.8-million), which can be increased to $750,000 if there is “intentional or reckless conduct”. 

Firms in the US can be fined up to $15-million. The UK has no upper fine limit, with the largest fine imposed being £6.5-million (R153-million) in 2022.

The increased fines won’t apply to audit failures in Steinhoff or Tongaat. Irba instituted its investigations into the two companies long before Godongwana’s intervention and new/rule changes cannot be applied retrospectively. 

So, Deloitte might end up walking away with having to pay only R200,000 per charge if it is found guilty of misconduct in its audit of Steinhoff and Tongaat. This happened in 2019 when PwC landed a paltry R200,000 fine for the errors it made in auditing SAA’s financial books.

“Unfortunately, there’s nothing we can do about it [the low fines that might apply in the Steinhoff and Deloitte cases]. All the audits that are currently in the process now … if there’s a mistake in any of those, we’ll then see those big fines coming. We must get the old cases out of the system and then the new regime of accountability will be in place.”

Unintended consequences 

It has been argued by some commentators that the increased fines might have the unintended consequence of making the auditing profession undesirable, given the increased scrutiny (and now fines) around their work. 

Nagy disagrees with this view.

“The new fines regime is no different than in the medical industry and others where lives are at risk. Legal exposures and fines are huge in many industries. Auditors have always been exposed to risk and could be sued by shareholders [as seen in Deloitte’s settlement with Steinhoff and Tongaat]. I don’t see the rationale for leaving the profession or not wanting to practice because of the possibility of the fines.”

The numbers also support his views. There are 3,601 registered auditors in SA. Although this number has dropped over the past few years, the number of “assurance auditors”, or those authorised to issue audit options, has risen to 2,789 in 2023 from 2,746 in 2021. 

Even the number of would-be auditors signing up for training programmes has risen over the past three years. Nagy says this indicates interest in the profession, regardless of increased scrutiny. 

Irba won’t impose the maximum fines of R15-million or R25-million in all circumstances. 

“The fines will be applied proportionately. You can’t take a small practice with a turnover of R5-million, which audits the books of a cafe on the corner, and slap it with a R25-million fine. That’ll take the small practice out of business.

“The high fines would be for those public interest entities where things were grossly problematic … where there were millions or billions of rands lost due to audit failures.”

Other confidence and independence-building measures that Irba is pushing for include getting firms to voluntarily rotate their auditing firms; encouraging auditors to blow the whistle on wrongdoing when carrying out audits and disbarring an auditor if found guilty of wrongdoing. 

Irba is working with the South African Institute of Chartered Accountants (Saica) to refer non-audit investigations (involving accountants) to the professional body. 

Irba wants a registered auditor to also have a registration with a professional body such as Saica and to publish the results of its inspection of firms in order to be more transparent. 

Irba is also calling for auditors to publicly release materialities (such as misstatements) in financial statements that are detected during the audit process. DM