Analysis: Why auditing firms are in crisis

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Analysis: Why auditing firms are in crisis

'We are concerned that audit quality is declining'

Journalist

The work of auditing firms in South Africa has become more complex and demanding in the “current socio-political climate”, the CEO of the Independent Regulatory Board for Auditors (Irba), Bernard Agulhas, told Times Select in an interview this week.
The entire auditing profession has suffered severe reputational damage amid the growing public outcry and a slew of investigations by regulators and law enforcement, he said.
“Irba has a role to play in helping to restore confidence in the profession.
“Based on what we see, we are concerned that audit quality is declining. The number of complaints lodged has increased due to heightened awareness and understanding of the work of Irba,” said Agulhas.“What has changed significantly is that the nature of the current cases is more complex than before and the level of public interest in the matters is far higher than ever before. In the current socio-political climate, auditing is receiving far more media attention than ever before.”
Agulhas said the current “crisis” in the auditing industry is “because of the behaviour of auditors and decisions firms made”.
Irba investigates between 100 to 150 matters a year stemming from complaints or proactive action it takes spanning across all 4,500 registered auditors and the 1,900 firms they work for.
Most recently, it was revealed that two senior directors at KPMG had failed to declare loans from VBS Bank – while they were themselves involved in auditing the bank.
KPMG and black-owned firm Nkonki were earlier this month fired by the auditor general’s office, which audits all state-owned companies and government departments. This had led to Nkonki announcing the liquidation of its Sunninghill office, with potential job losses for 180 people.Considering the scale and complexity of the issues that require investigation, Irba needs all the support it can get, said Uli Schäckermann, a former auditor for 34 years who was involved in the drafting code of conduct documents for Irba and the South African Institute for Chartered Accountants (SAICA).
Schäckermann told Times Select it was not just the big four firms in that were suffering.
“The whole profession is now in doubt, as to being able to deliver the promised services in being able to give peace of mind to people who rely on financial statements that have been audited,” Schäckermann said.
“It’s the big four particularly because they audit a huge amount of listed entities but it really comes down to every registered auditor that is probably looked at a little bit skeef.”“The workload for Irba has never been as big it is right now because of the multitude of matters. The budget needs to be sorted out. Irba is the main player and the entity most responsible for making an impact on the profession,” Schäckermann said.
“Irba needs every support it can get. It has a big job in hand.”
Irba operates on an annual average budget of around R100-million, which is partly subsidised by government.
The regulator reported a deficit of R4.4-million for the 2016/17 financial year while receiving 165 new complaints to investigate, over and above ongoing investigations.
But Irba has not been idle. As the controversies grew, Irba held consultations around a Mandatory Audit Firm Rotation (MAFR) process due to concerns over “high levels of concentration in the market”.
For example, some of the big four firms (KPMG, PwC, Deloitte and Ernst and Young) have audited some JSE-listed companies for nearly 50 years. The same firms also audit 90% of JSE companies.
By 2023, the implementation date for MAFR, Irba hopes a wider distribution of public interest audit work will alleviate many concerns.
In December, Irba announced planned changes to the Auditing Professions Act, which would grant the regulator stronger powers to investigate and sanction “errant auditors”.Agulhas said that process was continuing, with draft changes being finalised before submission to cabinet.
Historically, Irba could impose a R250,000 fine as a sanction but, under the proposed changes, it wants to be able to combine penalties and align sanctions to the severity of the offences.
Some of the proposed changes would require changes to the act and would only be implementable for offences that occur after the date of the amendments.
The new sanctions would include giving Irba powers to suspend auditors from practising, removal from the register with a time frame before the auditor can re-apply, and the publication of findings and auditors’ names in public-interest matters and matters that are settled by disciplinary hearing.Agulhas said South Africa was not alone and the proposed changes were an attempt to integrate global and self-driven initiatives.
“Regulators are reporting similar issues; a lack of professional scepticism, independence concerns where relationships are too cosy and declining audit quality [globally],” he said.
Auditors would have to step up the game to meet heightened expectations from the investment public, he added.
“This expectation is largely informed by the environment in which auditors and business operates, which includes increased complexity and the prevalence of corruption and fraud.”

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