Days are numbered: report reveals sad state of auditing in SA

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Days are numbered: report reveals sad state of auditing in SA

List of contraventions recorded by regulatory board is a loud cry for more oversight in the industry

Londiwe Buthelezi


Taking on work beyond their capacity, tampering with audit files and preparing financial statements for companies they were supposed to audit are some of the contraventions uncovered during inspections of audit firms in 2018.
The contraventions recorded by the Independent Regulatory Board for Auditors (Irba) sheds light on how the audit failures that left the profession’s reputation in tatters stemmed from a longstanding systemic risk. They are also a loud cry for more oversight in the industry.
The recently released Irba report detailed the outcome of inspections carried out between April 1 2017 and March 31 2018. The regulator performed comprehensive quality control inspections on 11 firms. Four of the firms had “significant” systemic audit quality deficiencies and one had to be referred for investigation. Irba also inspected 188 individual audit files.
The Auditing Profession Act prohibits Irba from naming and shaming the culprits or providing any additional information regarding inspections. But the regulator said firms are referred for investigation when there are recurring findings or quality trends that cause continued noncompliance with the standards, among other things.
The regulator said that while carrying out inspections it found numerous contraventions where auditors did work they were not supposed to do for their clients, such as preparing the financial statements.
“In all these instances relevant safeguards to auditor independence were found to be lacking,” Irba said. It said many of the concerns identified during inspections stemmed from this lack of independence.
Although shortcomings in firms’ conduct and quality controls are not an indicator that auditors have lost their independence, Irba says they do highlight the possibility that the financial statements may be materially misstated or that an inappropriate audit opinion may have been issued.
In the case of auditors helping companies prepare their financial statements, it is not difficult to see how such misstatements can happen. The fact that the Irba identified incidents that were modified or bulked up with additional documents for inspections also does not bode well for audit independence.
The other grave concern raised by the regulator is that some firms are taking on more clients than they can properly audit. Irba says the pressure on auditing fees, which have remain largely stagnant, resulted in some firms accepting clients that may put their reputation at risk, and audit work that they do not have competence to perform. It says some firms now rely heavily on the services of external consulting firms to express accounting opinions, review adherence to reporting standards or to audit IT-based documents.
Although the 2018 report shows a considerably lower number of firms with an unsatisfactory inspection outcome – they decreased to 13 in 2016 and seven in 2017 – the gravity of deficiencies identified by the regulator at both firm and individual file level diminishes trust on the audit profession even further.
Irba says most of these audit quality deficiencies are chronic concerns that inspection reports have highlighted year after year. “These recurring findings do not only occur on follow-up visits to firms and engagement partners, but have also been observed on new inspections of different engagement partners within firms that were not previously inspected,” the regulator wrote in its report.
But if publishing of these inspection reports does not arrest the recurring contraventions to the auditing regulations, should the Irba not do more if it wants to dispel the notion that it is toothless?
The regulator says it will be taking a much stricter approach with leadership of audit firms where there are recurring concerns year after year, and ensure that harsher penalties are imposed. It is banking on the approval of the proposed amendments to the act, which forms part of the Financial Matters Amendment Bill.
If such amendments became law, the minister of finance would have the power to determine maximum fines, and Irba hopes those will be significantly more than the current limit of R200,000 per offence levied when auditors are found guilty after an Irba disciplinary hearing.
But then again, any amount of money may not be a sufficient deterrent when one has a fat bank account.

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