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Our views in this article are to large extent based on our involvement in high-profile cases involving the prosecution of professional misconduct allegations levelled against auditors
Several auditing and accounting scandals in recent years − most notably in relation to African Bank, Steinhoff and Tongaat Hulett − undoubtedly had a negative impact on the reputation of the auditing and accountancy professions. Public trust and confidence in the auditing profession have reached an all-time low. The question that may well be asked is whether the high-profile audit failures signal a decline in standards of professional conduct and integrity in the auditing profession in particular. The fact is that large multinational auditing firms are probably better resourced, in terms of internal technical advisory capacity and digital resources in particular, than ever before and have, one would assume, all the necessary internal checks and balances to avoid significant audit failures.
Audit firms that held so much prestige and were sought-after places of employment for not only auditors and accountants but also other professionals have in recent times found themselves having to explain their role in major corporate failures. To their credit, the auditing firms have acknowledged their failings and have set about trying not only to repair the reputation of the profession but also to implement practical measures to close the gaps that have emerged in high-profile matters such as the collapse of Steinhoff, Tongaat Hulett and African Bank. It is, however, of vital importance not only to the auditing and accounting professions but also to the commercial world that relies so heavily on audit opinions, that confidence and trust in the auditing profession be restored.
The audit failures and corporate collapses have also brought into sharp focus the role of the Independent Regulatory Board for Auditors (IRBA) and the South African Institute of Chartered Accountants (SAICA). Both bodies have reaffirmed their commitment to ensuring the integrity of the profession through the enforcement of standards of professionalism and conduct.
What could the causes be of what can only be described as fundamental audit failures? Although the potential causes are, in our view, no doubt complex and not capable of definitive comment in a condensed format such as this article, we offer the following observations and comments on some potential areas of concern:
All of the above, at first blush, appears to be relatively easy to remedy. However, it is important to acknowledge that auditing does not take place in isolation from the audit client or from the problems that beset other professional services’ industries. Pressure from clients for a clean audit opinion, and therefore a clean bill of financial health, is very real. Accordingly, a new model of engagement with clients is needed.
Without presuming to be exhaustive, we suggest that the following points of import may be identified as learnings for auditors arising from the cases that have been reported in the media and have served before the disciplinary committee of the IRBA over time:
What has been the response from the profession so far to the state it finds itself in? It has, through various mechanisms, attempted to address the shortfalls. Two of these are briefly discussed below.
One of the ways in which the profession has responded to the possible limitations that maintaining client confidentiality by an auditor may have on an auditor not disclosing a client’s non-compliance with laws and regulations has been the implementation of the Non-Compliance with Laws and Regulations (NOCLAR) standard by the International Ethics Standards Board for Accountants (IESBA). This has subsequently been included in the SAICA Code of Professional Conduct. NOCLAR addresses acts of omission or commission, intentional or unintentional, committed by a client or an employer, or their employees or contractors, contrary to prevailing law. It allows auditors and other professional accountants to make disclosures of non-compliance with laws and regulations to public authorities without being constrained by the duty of confidentiality to the client. It effectively provides for a ‘whistle-blowing’ option for auditors and is a clear indication of the profession’s obligation to act in the public interest at all times.
Enhanced sanctioning powers for regulatory bodies
Another mechanism adopted to restore public trust and confidence in the profession is through the amendments articulated in the Auditing Profession Amendment Act 5 of 2021 (Amendment Act). The Amendment Act does away with the maximum fine of R200 000 which a disciplinary committee of the IRBA could impose on an auditor found guilty of professional misconduct. Compared to other jurisdictions such as the UK and the USA, this amount is menial and arguably does not represent a significant deterrent. In addition, it amounts to not even a fraction of the audit fees that the audit firms charge clients in audit fees on major audits. The amount of the fine will in future be an amount to be determined by the Minister of Finance. This amount will likely be significantly higher given that regulators in other jurisdictions are handing down significant fines to auditors and audit firms. The Amendment Act also contains other provisions which seek to strengthen the powers of the IRBA, including include search and seizure provisions, the power to subpoena in the investigation process, and the simplification of the disciplinary hearing process. All of these amendments appear to be aimed at ensuring that the IRBA can, as the watchdog of the profession, hold auditors accountable in a more streamlined and efficient process. Inevitably the effect of this would be to enhance the credibility of both the IRBA and the profession.
We draw your attention to an article by Professor Michael Katz, chair of ENSafrica, in the Daily Maverick  in which he analyses the allocation of responsibility for corporate failures to all the role-players in the compliance ecosystem. It is important to appreciate that the auditor is only one of the role-players involved in the compliance ecosystem − others include management, the board of directors (particularly the non-executive directors), the audit committee, the institutional investors who elect the directors and the regulators such as the JSE, IRBA and SAICA. Katz also suggests that the time has arrived, in the complexity of the modern business world (and often added to by global dimensions), for the redesign of the audit model, the role of the auditor and the legal liability and responsibility of auditors.
Real and concrete reform in the profession must start with the auditors and audit firms themselves. If they have an understanding that what they do is in the public interest and that they are indeed accountable to the public who rely on assertions made in audit opinions signed by them, a real shift in the auditing profession can take place. The legislative reform is there in the form of the Amendment Act and other mechanisms. What is needed is genuine ‘buy-in’ and cooperation from auditors and audit firms and a will from the profession as a whole to recover the prestige and esteem it once held. It appears to us that there has not been a fundamental decline in standards of professional conduct and integrity, but that the auditing profession simply finds itself out of step with the increasingly complex and demanding modern commercial world. The difficulty may be that the methods and processes have remained relatively static in a rapidly evolving world.
AUTHORS │ Pareen Rogers BA (cum laude), LLB (Wits) is an admitted attorney of the High Court of South Africa; Fritz Malan BA, LLB (US) is an admitted notary and attorney of the High Court of South Africa and admitted to the Texas Bar. They are both executives in the employment law department of ENSafrica