Corporate failures… Why don’t we learn?

corporate failure

By Marteli Brewis

The world of accounting is rapidly changing as South Africa scrambles to regain its status as one of the world’s leaders in terms of corporate reporting. But the profession has been marred by enormous scandals involving fraud, corruption and unethical behaviour over the past few years, causing mistrust amongst society for a profession that used to be characterised by integrity.

SAICA’s view is that the overall finance eco-system and capital markets’ stability are called into question by the current situation of corruption, fraud and malfeasance and needs to be reformed. SAICA strongly believes that the answers to the trust restoration and relevance questions lie in the profession embracing the concept of joint accountability for the stability and trustworthiness of the finance eco-system.

That is why SAICA hosted a discussion on this subject in June, which was led by Bruce Whitfield and included the following panellists: Stanley Subramoney, chairman of Nedbank’s Group audit committee; Ignatius Sehoole, CEO of KPMG; Mpho Mashatola, DRD Gold’s group financial controller; Julius Mojapelo, CEO of the Institute of Internal Auditors South Africa; and Tsakani Maluleke, Auditor-General of South Africa.

When talking about corruption, Stanley Subramoney, chairman of Nedbank’s Group audit committee, feels it all comes back to one thing − greed. ‘The culture of greed is of concern and the root cause of the challenges we face in corporate South Africa.’ Having been in the profession long enough to be able to test the moral compass thereof, Subramoney feels the trust deficit in the profession is at an all-time low. ‘South African citizens are angry and directing their anger, sometimes unjustly so, at the auditors.’

He adds that there are no quick fixes. ‘A few individuals should not be allowed to tarnish this great profession. We have several well-meaning people that have good intentions. But we need courage. One must have the courage to look down that abyss and say “I’m not going there.” Together we have the courage and collective wisdom to work together towards change.’

Ignatius Sehoole, CEO of KPMG South Africa, feels nobody is learning from the scandals. ‘We don’t learn the fundamentals. We learn the rules and the mechanical tinkering. The real thing is people get co-opted easily through greed. One of the important things we are focusing on at KPMG is integrity and serving the public interest. For me, corporate South Africa, and it doesn’t matter where in the financial value chain you are, need to be focused on integrity, on serving the public first and less on greed.’

Sehoole explains that when he was first attracted to the chartered accountancy profession, there was an aura of integrity around it. ‘At the moment it is non-existent and that is what we have to get back. It’s not about technical expertise. It is our moral compass and applying our ability in a sceptical, analytical way; in understanding whether all the information makes sense within the broader context of the organisation. Unless we regain that public trust by being the most trusted and trustworthy professionals, not only in the country but also in the world, we have lost it as a profession.’

He firmly believes that the profession has a golden opportunity at the moment to make the change it needs. ‘There is a call to arms in the profession at the moment. We have seen the other side – how they lead with distinction and commitment in corruption. We need to double our efforts, our commitment to being able to lead with distinction, pushing integrity, ethics, and making sure that we are true to our purpose of serving the public interest. This is war! The other side has shown us how committed they are to corruption. The question is, how committed are we?’

Mpho Mashatola, DRD Gold’s group financial controller, feels the integrity and responsibility of good financial reporting, as well as any corporate individual being a good, responsible corporate citizen, lies with management. ‘It’s all good that every time a corporate scandal happens everyone always asks where were the auditors, but then we have to take a step back and say, where was management?’

Mashatola believes management must conduct themselves ethically and so should the organisation. ‘And once ethics is gone, none of the other principles or controls that you have matter. The fundamental is ethics.’

She feels ethical conviction comes from within. ‘I see myself as an ethical representation of the profession that I belong to. It’s the pride that you have in yourself. If everybody as individuals has that pride and behave ethically, we all contribute to the greater profession.’

Julius Mojapelo, CEO of the Institute of Internal Auditors South Africa, explains that ‘from an internal audit perspective, I think there needs to be a recognition of the internal audit as an item in the toolkit of the oversight structure. It’s only as effective as it is used and structured by the oversight structures.  An internal audit is not meant to catch the oversight out. It’s meant to create an environment where the promises made by the organisation are supported by the right systems to mitigate all the risks that are in the organisation.’

According to him, there is a structural flaw in the profession. ‘We need to decide whether we’re big business or whether we are organised through society as oversights on the economy on behalf of the people. We need to accept our licence to operate. Is it a social license, or a business licence? As a profession, we have not yet taken a stand on which side of the coin we fall. Right now, we have to accept we cannot negate our responsibilities to protect the economy. As auditors and assurance providers we have to take the blame for some of the things we do not pick up.’

Tsakani Maluleke, Auditor-General of South Africa, feels incidences of irregularities impacts all CAs(SA) in different ways. ‘Why don’t we learn from past mistakes? We tend to go for the easy answer. The easy answer includes setting up structures, fine-tuning the reporting framework, trying to fix internal audit. It seems to me the problem is not technical skills or a lack of structure. It’s about our moral competence, about character, integrity. We’ve got to interrogate matters differently. We’ve got to think broader about the information and not tick the box and not be happy with the “bells and whistles”, but rather think about the substance of the things that go wrong. Why is internal audit not functioning the way it should? Why is the remuneration committee not raising the alarm about the nature of those “super bonuses”? Why is the audit committee not functioning the way that it should?’

Secondly, she wonders whether people have the courage to speak up when something is out of order. ‘Do you drive a journey of continuous engagement and improvement? It was quite telling for me that with for example Steinhoff, it wasn’t one transaction. It was a series of transactions over time that got worse. And somebody must have picked it up. Were they too timid to speak up? Were they being incentivised inappropriately? Our issue is less about technical abilities. It’s about all of us who are sitting in the full ecosystem of corporate reporting and accountability, engaging in our duties in a way that is consistent with our social contract with humanity.’

The solution to the problem is multifaceted, according to Maluleke. ‘Firstly, we have to be quick to apply consequences. People must start seeing that crime does not pay. So, we’ve got to deal with the rigour, speed and effectiveness of our processes right up until conviction.’

But, in her opinion that is not the most important factor to bring about change. ‘The second thing, and I suspect in many ways probably more important, with a more lasting impact, is to make sure that from the leadership of the audit community, throughout the ecosystem, we are seeing conversations about understanding that we have a particular duty to society. We have a social contract with humanity and a duty to serve society. It’s easy to say the auditor’s duty is not to detect fraud. We need to start meeting the reasonable expectations of society. We can use technology (automation and AI) for the bare bones of it. You then have a much higher requirement for accountants, auditors, preparers, and those who oversee institutions, to apply appropriate judgement which is informed by integrity, ethics and social consciousness and a conscientiousness around delivering on the reasonable expectations of our citizens.’

For her, this starts with leadership. ‘Whether in the private or public sector, you’ve got to have courageous leadership that sets the right tone, that builds the right culture with the type of values that are consistent with having understood that we owe a debt to society. It’s about ensuring the core of professionals that are there to serve society are imbued with these values and around this very duty. We have one country and it’s ours to save. We have an enormous responsibility as professionals who have leadership roles in different spaces. Let’s embrace those duties. Let’s use this opportunity to start shifting the needle.

SAICA continues to engage and bringing the various role-players in the financial reporting ecosystem in order to identify the problems and possible solutions that will promote efficacy in South Africa’s capital markets.