The Independent Regulatory Board for Auditors – hard-nosed watchdog of the profession or docile lapdog?
- SIMON MANTELL
- 11 Oct 2017 01:21 (South Africa)
The Independent Regulatory Board for Auditors (IRBA) is the statutory body mandated by the Audit Professions Act to regulate the audit profession and its responsibilities include the monitoring of audit firms with respect to auditing and ethical standards; investigating and taking action against audit firms for breaches of improper conduct and as well as enhancing public confidence in the profession.
Given its investigative and disciplinary powers, the moniker of “auditing watchdog” has stuck to the regulatory body with the underlying expectation being that the IRBA fulfils this duty in a highly effective manner.
Whilst the questionable conduct and performance of KPMG South Africa dominates the current news cycle, sight must not be lost of the fact that there are other large audit firms who are equally guilty of significant breaches of the Audit Professions Act with respect to their professional work on behalf of state owned entities (SOEs) and it would be naïve to believe that KPMG is just a delinquent outlier in a fairy tale audit environment of compliance and probity.
It is important for any organisation to accurately manage expectations and in this regard it appears that the IRBA has fallen well short of the mark with its repeated communication of South Africa’s mythical ranking of number 1 in the world over seven consecutive years for auditing standards and reporting. As the home truths of KPMG and other audit firms’ conduct become ever more apparent, the IRBA seems to have added further fuel to the fire of expectation with its proactive media releases giving the impression of a regulator at the top of its game where investigations follow due process and where full accountability is demanded by the IRBA from errant audit firms.
Further analysis of the number one audit ranking and the efficacy and the modus operandi of the IRBA is required to establish whether South African auditing is indeed as good as claimed and whether the IRBA is in fact firing on all cylinders.
If much of auditing is about the science of numbers and hard evidence, then the IRBA needs to take us into its confidence as to how it has perpetuated the myth that South Africa was number one in the world for auditing and reporting standards for seven consecutive years when it is apparent that there is no hard evidence or scientific methodology to support this ranking.
The World Economic Forum (WEF) collates data each year in what is known as its Global Competitiveness Index (GCI) which comprises 114 indicators that are grouped into 12 pillars with a sub-section being auditing standards and reporting. The computation of the GCI is based on some statistical data collected but it is apparent that scoring for 80 of the 114 indicators is drawn from a qualitative “Executive Opinion Survey” conducted by the WEF.
It is apparent that executives are asked questions and provide scores from one being extremely weak to seven being extremely strong which then generates a scorecard and ranking. Quite unbelievably, the sample of executives for South Africa is less than 100 business leaders per annum and the questions are based exclusively on perception as opposed to reality. The WEF does not explain what auditing and reporting standards are and it has been independently confirmed that it is “generally understood to refer to auditing standards adopted by auditors and the financial reporting standards which entities are required to use in preparing financial statements”.
What is quite clear is that this perception ranking has nothing to do with the inspection of physical audit work to establish whether it conforms to auditing standards or not and that this survey and ranking has no scientific or evidentiary basis. In simple language, it is a ranking of no value and the IRBA, for reasons best known to itself, has continued to communicate what appears to be a “fake good news” story.
And what about the perception of an aggressive regulator firing on all cylinders which ensures accountability of registered auditors, or will the IRBA’s performance, like the world ranking, wilt under closer scrutiny?
The regulator’s performance must be measured against its statutory responsibilities which includes the mandatory and frequently required inspection of the design and implementation of audit firms’ systems of quality control as well as compliance with the relevant professional standards. In other words, the IRBA is required to be proactive in this process and by way of example, one is tempted to ask whether the IRBA should not of its own volition have identified qualitative weaknesses at KMPG years’ ago when continual reportage highlighted concerns about the SARS Report and the Gupta group companies?
If the IRBA’s lack of energy in the proactive identification of problems at audit firms is cause for concern, then its investigation and disciplinary process ask even more questions best illustrated in its management of complaints from third parties where the indications are of an investigative process hardly predisposed towards any great sense of urgency.
During the course of an investigation the Investigations Committee can, if there is evidence of improper conduct, reach an agreement with the respondent audit firm which involves an admission of guilt and a fine ranging from between R 10,000 to R 200,000 per charge representing less than a slap on the wrist for a large firm.
The convenient rider to the “plea bargain” arrangement is that the findings are published in what are known as “general terms” meaning that firms and individual auditors are not named.
It is quite evident that the IRBA does not have the necessary manpower or financial resources to tackle major audit firms with large legal budgets and for this reason, the regulator will aim to obtain a plea bargain wherever possible. As with the publishing in general terms, another curious arrangement is that the all-important charge sheet which is eventually agreed to between the IRBA and the respondent is kept secret from the complainant which raises serious concerns not only over lack of transparency but also raises the legitimate question as to whether the respondent was correctly charged?
Whilst the IRBA has the power to de-register audit firms and it might well do so with small firms, the question remains whether it has the stomach to take on the large firms in the event that they step out of line.
There are hard questions which need to be asked of the IRBA and of our legislators which include but are not limited to:
- Why has there been this persistent misrepresentation of our audit capabilities by the IRBA when it is quite apparent that these “world rankings” are not based on substantive evidence?
- Why has the IRBA not been seen to be proactive given that its duty is to regularly inspect audit firms and if it didn’t detect earlier compliance issues at KPMG on its regular inspections, then why not?
- If it did detect compliance issues, then what action did the IRBA take?
- If one accepts that justice must be seen to be done, then how can the IRBA honestly believe that anyone will have faith in a process where charge sheets are removed from public scrutiny and when plea bargains are finalised in shrouds of secrecy?
- Does the IRBA or Parliament really believe that insignificant fines and secrecy are deterrents to audit firms or would fines akin to those provided for in the Competition Act be more suitable?
- Does the IRBA believe that based on its current performance that it takes appropriate action against registered auditors in respect of improper conduct?
- Does the IRBA really believe that with its current level of management of the audit profession that it is truly developing and maintaining accountability and public confidence?
- Does Parliament believe that the IRBA is performing satisfactorily?
It would appear that much of the audit profession involved in the audit of SOEs has adopted a supine approach to its work and in doing so, it has become part of the state capture project. That all of this has occurred before the IRBA’s eyes is of serious concern.
For a profession which has traditionally set such high standards, one hopes that the public and media will demand nothing less than optimal performance from the profession, the IRBA and Parliament so that confidence can be restored in what is a vital profession.
Time will tell. DM