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Irba and the auditing profession in crisis: An eight-point recovery plan

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Simon Mantell served articles with a big four audit firm and runs a biscuit factory in Cape Town.

The paucity of general competence and the lack of understanding of elementary subject matters such as conflict of interest by those appointed to lead the audit profession in executive and board positions is best illustrated by the 2020 appointment of Jenitha John as the CEO of the Independent Regulatory Board for Auditors.

Before her appointment at the Independent Regulatory Board for Auditors (Irba), Jenitha John served as head of the Tongaat-Hulett audit and risk committee in a non-executive board position. Over a lengthy period, it appears that she failed as spectacularly as the external audit firm Deloitte in her oversight role as the Tongaat board produced successive annual financial statements which were consistently not worth the paper they were printed on.

The collapse of Tongaat and its well publicised accounting irregularities were known to the board of Irba and John. Both would have been aware that in the coming months, Irba would institute an investigation to establish whether Deloitte, as the external auditor, had discharged its professional responsibilities in accordance with International Standards on Auditing, the Auditing Professions Act and the Rules of Professional Conduct.

John and the board of Irba would also have been aware that the Irba investigation would lead to disciplinary action in the event that the investigation unearthed audit irregularities on the part of Deloitte.

If it is inconceivable that John could not have considered her potential conflict of interest as she applied for the job of CEO of Irba while mindful of the Deloitte train coming down the Irba investigations and disciplinary track, then the decision by the Irba board to not only appoint her, but then hide behind excuses that her appointment was “compliant and consistent with policy” beggars belief and displays a lack of logic not dissimilar to that of a poorly functioning primary school tuck shop committee.

The dismissal of the Irba board and the recent resignation with immediate effect of John could not have happened sooner. As the audit profession in South Africa hurtles on a low-road trajectory to irrelevance, a small window of opportunity has opened where the Irba can be transformed into a properly capacitated regulatory body which is respected and feared in equal measure as it brings audit miscreants into line.

It is vital then that the finance minister appoint hard-nosed, capable individuals to the Irba board which will be diametrically opposed to the historical choices of board members and accounting authorities at statutory bodies and state-owned entities where government ministers generally opt for a combination of toadies and useful idiots.

A competent board will appoint a competent CEO who will be required to have a steely resolve if Irba is to properly discharge its own identified key responsibilities which include:

  • Helping to create an ethical, value-driven financial sector that encourages investment, creates confidence in the financial markets and promotes sound practices;
  • Developing and maintaining auditing and ethical standards that are internationally comparable;
  • Registration of auditors who meet the registration requirements;
  • Monitoring registered auditors’ compliance with professional standards;
  • Investigating and taking appropriate action against registered auditors in respect of improper conduct; and
  • Developing and maintaining stakeholder relationships to enhance performance, accountability and public confidence.

The drawing of a distinction between the impact of audit failures at large listed entities and SOEs and those of small and medium enterprises (SMEs) provides the understanding as to where the focus necessary for short-term remedial action in the audit profession is required.

Typically, the audits of listed entities and SOEs are the domain of the big four audit firms and in the case of one or two large SOEs, well-established black-owned firms have assumed audit responsibilities.

The audit fees generated are eye-watering and when these listed entities and SOEs fail through financial mismanagement which is consistently undetected and unreported by the external auditors, the repercussions are significant for a broad swathe of people including creditors, employees, shareholders, pensioners, taxpayers, the state and the indigent who are dependent on state grants

SME audits are typically performed by lower-tier medium or even smaller audit firms and in the event of a catastrophic audit failure and business collapse, then far fewer people are affected.

In bringing those errant audit firms to book, it is important to focus on the area which needs immediate attention and it is argued that the audit failures of listed entities and SOEs is the most important priority based on the very negative financial impact it has on what can be argued to be millions of our citizens and the negative publicity leading to lack of trust in the audit profession.

As things stand, Irba is hopelessly outgunned in human and financial capital as it attempts to tackle the alleged large audit firm failures. Irba’s small investigative and disciplinary departments lack both the necessary human and financial capital to timeously and simultaneously investigate and run multiple disciplinary hearings concurrently against large audit firms, which, with their access to in-house and external legal resources provide a legal barrage of obstacles resulting in matters being kicked down the road, thus further delaying justice.

What is the short-term practical eight-point plan for Irba and the audit profession?

  1. The appointment of independent, capable and hard-nosed board members at Irba.
  2. The appointment of a capable CEO who is equally independent and untainted by audit scandals.
  3. The establishment of an independent investigative directorate which sits outside Irba and is financially well resourced and responsible only for investigations into the large audit and corporate failures.
  4. A well-resourced independent investigating directorate will fast-track and prioritise large and key audit failures such as African Bank, VBS Mutual Bank, Steinhoff and Tongaat and will prepare comprehensive evidence packs which will come before disciplinary committees with far shorter lead times.
  5. The fines presently imposed by Irba are meaningless when measured against the audit fees and revenue of firms and the quantum of fines levied should be increased to be similar to those of the Competition Commission.
  6. External auditors are far too lax in failing to report Reportable Irregularities and the existing legislation must be enforced where the failure to report a Reportable Irregularity by an auditor results in jail time and/or a fine.
  7. It must be made compulsory for the appropriate regulators, on receipt of Reportable Irregularities reports from Irba, to report back to Irba as to how the regulators have dealt with these Irba-generated reports.
  8. The board of Irba has traditionally been comprised of members who frequently have close links and friendships with those in the profession. The only way Irba can deliver on its mandate is if board members are completely independent in order to position Irba as a regulator with real teeth which can exercise proper oversight over registered auditors.

The disastrous state of affairs at every major SOE and most statutory bodies in this country has its roots in the frequently incapable people appointed by government ministers to serve on the accounting authorities and boards.

While it is in everyone’s interests for Irba and the auditing profession to flourish, the key question is whether the minister of finance will buck the trend and appoint a competent and no-nonsense board to Irba.

A failure to do so will simply hasten the demise of the audit profession. BM/DM

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