Auditing Profession in Peril

Article published by Accountancy SA, March 2021

If the audit profession in South Africa is serious about restoring trust it will need to reassert the primacy of professional scepticism and independence. There needs to be a balance between radical thinking and practical solutions. Greater clarity and transparency in the profession will ultimately result in a regime that allows auditors to better assess, assure and inform. Only then can real change come about.

The auditing profession has long played a revered and coveted role in society. Over the past few years though, the institution has been marred by scandal, fraud, corruption, and unethical behaviour, resulting in a credibility crisis. The entire profession is facing a lot of headwind, an increasing demand in terms of their responsibilities and duties and an unprecedented pressure to change. Not just in South Africa, but globally.

Nonkululeko Gobodo, CEO at Nkululeko Leadership Consulting and the first black South African chartered accountant and pioneering entrepreneur, qualified in 1987. She says: ’Life has completely changed since then. For me as a business leader, it’s frustrating to spend so much time on technical interpretations, rather than business. Financial statements have become meaningless. I look at the cash flow because it is the only thing that makes sense in financial statements.’

Stephen Koseff, Investec Group’s former CEO, agrees that the auditing profession has become very complicated over the years. ‘I was there in the early days when there were no statements. They started with “exposure drafts”, which were the pre-statements. You worked on principles which are actually a lot better than rules. Guys will find their way around rules. The financial statements had to be fair and reasonable. They were not rules, they were philosophies. You had to get to the root of the problem and understand what the substance was, as opposed to what the form was, he says.’

‘When you understand the people rather than look at the financial statements, you start understanding what the business is all about. Often the financial statements say one thing and the reality is something totally different. We need to press a reset button. The whole world has become very rules-based.’

Nkateko Mathebula, finalist of SAICA’s 2020 Top-35-under-35 competition and serial social entrepreneur believes what is happening at the moment has been happening forever, nobody just knew. ‘Now, because of social media and the technology, we know about it as soon as it happens. All this stuff is just being brought to the surface.’

If you look at all the scandals – Steinhoff, African Bank, VBS − does the CA profession and the world of finance deserve the criticism?

Kosseff believes CAs, as the party everyone is relying on to ensure financial statements reflect the reality of the company, are on the frontline of the risk. ‘That is quite a difficult task. If someone is intent on defrauding you, they will get away with it for quite a while before you trip them up. You’ve got to keep your eyes wide open to find what doesn’t add up. These guys are clever and have ways of camouflaging reality. You’ve got to try and get to the substance and maybe that is where the profession has lost its way a bit – where it went for the rules as opposed to the substance. I wouldn’t like to be in the profession because there’s a big expectation for you and you can miss a whole lot. CAs need to broaden their thinking. Get to the root of the problem. If it doesn’t add up and if it doesn’t make sense, you’ve got to keep questioning.’

Gobodo feels it’s unfair that so much responsibility gets put on people who are there on a temporary basis, and not fulltime. ‘That’s why we have combined assurance – because the responsibility has to be spread equitably among those who are responsible for governance. There is an expectation gap that is difficult to close, because at the end of the day you are the one who signs and certifies the financial statements. But it’s unfair to depend on the auditor, rather than the executives and the board, for the credibility of financial statements. Auditors are there to certify the financials.’

That, according to Kosseff, is why ‘who’ is much more important than ‘what’. ‘It’s important to get an understanding of who the people are. Can you rely on them? What are the systems and processes that ensure that you have protection? And if organisations have an open culture where anybody can talk to anybody about anything, then you get very quick escalation. If they have a culture of fear, it goes underground, and people are too scared to whistle blow.’

Mathebula feels almost caught in the middle. ‘When I was younger, the perception I created of the profession was “the auditors will come in and save the day”. So, I understand why people are now focused on why the auditors didn’t catch the defrauding. I think if we want to change the expectation from the public’s point of view, it has to be an exercise of transparency of the process and take it back to those basics. A reset would be amazing, but until we get there, we have to work with what we’ve got, and that is transparency.’

When it comes to the implementation of ethics and values in organisations, Gobodo does not think it should start with the organisation. ‘We need to go back to good values as human beings and citizens of countries. If you don’t have good leadership at a government level, the investors cannot have confidence in us. Unfortunately, in South Africa, in the past few years, we’ve seen a deterioration of those ethics and values. If our leaders are ethical themselves and demand ethical behaviour from citizens, it becomes easier to cascade it down. This still doesn’t absolve the board and executive management to reset.’

Unfortunately, if someone is skelm, they are skelm. It is very difficult to regulate ethics. Kosseff believes, however, if your organisation has a strong culture and value system, these people will be found out because people will hold them to account and escalate. ‘Everyone is your watchdog, provided they subscribe to the culture and values of the organisation. I don’t care what the government does, but in a corporate I want to know they uphold cast-iron integrity. It should be about “us” and not about “me”.’

There is an old joke that reads: ‘auditors solve problems you didn’t know you had in ways you don’t understand’, and it seems to be true for the whole profession.

The problem might lie in the fact that the public has unrealistic expectations about the role of auditors and the purpose of audits. Auditors are not tasked with fighting fraud, but rather to provide reasonable assurance to verify whether the financial statements of a company fairly represent its financial position.

Mathebula agrees the answer lies herein. ‘We need to extrapolate what reasonable assurance is. If more people understood that auditors provide reasonable assurance and not absolute assurance, it may answer some questions. We need to have conversations and see how we can close this gap. Because reasonable does not mean absolute!’