Fixing the faults in South Africa’s corporate reporting ecosystem

SAICA’s CEO Freeman Nomvalo and Project Director Thandokuhle Myoli spoke to Monique Verduyn about redesigning the audit profession so that it brings out the best in its people and the wider role and purpose of audit in serving the public interest.

Since 2017, the auditing profession has been plagued by high-profile corporate failures that have implicated auditors. As a result of state capture revelations, share price collapses, and corruption allegations, the South African public continues to question how audit can be relied upon to protect its investments.

In his February 2020 Budget Speech, Finance Minister Tito Mboweni announced that an independent panel of experts would be appointed to review practices in the auditing profession. In addition, the SA parliament is considering legislation to strengthen the Independent Regulatory Board for Auditors (IRBA). Shortly after the Minister’s announcement, COVID-19 made landfall resulting in the national lockdown. National Treasury will most likely follow up on that announcement soon.

Determined to make its own contributions and recommendations, these events prompted the South African Institute of Chartered Accountants (SAICA) to embark on an audit reform project in August 2020.

Thandokuhle Myoli CA(SA), Project Director at SAICA, says the project has focused on two main points: benchmarking the profession against its global counterparts and assessing what lessons could be learnt from what is happening globally in the profession; and engaging in a wide consultation process with audit firms, CFOs, business and investor groups and audit committees, as well as a number of stakeholders who have been quite vocal about their views on the profession.

‘We plan to continue with the stakeholder engagement process,’ says Myoli. ‘We want to determine what has led the profession to its current state and what can be done to address the problems that have arisen. The focus is on creating dialogue and finding solutions together as a profession.’

Regaining public confidence

Freeman Nomvalo, CEO of SAICA, says regaining the confidence of the public is crucial. ‘The perception is that auditors cannot be trusted and for as long as people do not see consequences for unethical behaviour, the skills and values of the profession will not be respected. Accountability must be visible,’ he says.

‘One of the key issues stakeholders raise is the conflict of interest that arises when firms do lucrative consulting work as well as provide auditing services for clients. Should there be restrictions placed on other work that can be performed by an entity’s auditor? Recently KPMG announced its intention to discontinue non-assurance services to listed audit clients.’

Nomvalo stresses that to achieve progress, each role player in the financial reporting ecosystem must play their part. ‘Each one of us must sweep in front of our own doorstep,’ he says. ‘We must focus on how we govern each other and how we hold each other accountable. We must also bear in mind that auditors come into a company only periodically; the decisions that result in corporate failures are often made by people within the organisation itself, some of them are members of SAICA. Reforming the auditing profession without demanding that other role-players take responsibility for their own actions would not make any sense at all.’

Closing the expectation gap

The expectation gap – the gap between what the public perceives the audit to be and what the audit actually delivers – is cited as one of the reasons for the reputational crisis in the profession. ‘It may well be that auditing is not understood, hence the gap,’ says Nomvalo. ‘Perhaps we should pause and think about whether we are selling the right product. In any commercial endeavour, you sell because there is a market for your product. As audit is a function prescribed in law, it may be that our clients have no choice but to use our services.’

‘How has our product evolved over time?’ he asks. ‘Auditors are not bloodhounds but watchdogs. Is that still relevant in the current environment? I am not saying it is or it isn’t. We need to engage with that question with an open mind. Perhaps we need to review the product to close the expectation gap.’

The governance failures at Transnet are just one example that highlights the need for transparency and increased accountability. Remember the embattled state-owned enterprise’s controversial locomotive tender that saw the figure ballooning significantly? Again, says Nomvalo, we have to question the role of auditors when they pick up fraud and corruption and other anomalies but fail to report. These are issues that should be confronted before they are raised by the public.

Partnering with other structures

SAICA acknowledges the work done on audit reform by the South African Auditing Profession Trust Initiative (SAAPTI), a voluntary committee established by the independent audit profession of South Africa.

‘We share ideas and attend each other’s meetings,’ says Myoli. ‘There is a lot of interaction between members who sit on both SAAPTI and SAICA structures which means there is no mixed messaging. It is in everybody’s interest to ensure that we work together to ensure that trust is restored in the profession. While we may not agree on every detail, the restoration of trust is the common goal.’

SAICA is also working closely with the Independent Regulatory Board for Auditors (IRBA) and is currently the only professional body accredited by IRBA. More than 90% of registered auditors are members of SAICA and are expected to behave in ways that uphold SAICA’s Code of Professional Conduct. When they fail, their actions have a direct impact on SAICA.

As the body that represents CAs(SA), SAICA was created in the public interest, that is the general welfare of the public that warrants recognition and protection. The very existence of codes of ethics or professional conduct is driven by the accountancy profession’s acceptance of public interest responsibility.

What does 2021 hold?

With its members in mind, SAICA plans to host discussions, seminars and events throughout 2021 to play its part in fixing the faults in the corporate audit system. These will include influential speakers with the expertise to discuss issues and share solutions that can be implemented while the profession awaits the outcomes of National Treasury’s investigation.

‘The discussion has in the main been led by the media,’ Myoli says. ‘It’s important that members of the profession begin to lead the messaging that goes out into the public domain. We are committed to advocacy, thought leadership, and the ongoing representation of the large number of SAICA members who operate in the audit profession.’

Nomvalo and Myoli agree that it is important that the profession proactively contribute to the discussion about audit reforms. In the UK, the Financial Reporting Council (FRC) ordered the Big Four accounting firms to break up their audit and non-audit operations to enhance transparency and to make audit operations truly independent from the rest of the firm. ‘If we do not take the initiative in South Africa, we may miss an opportunity to play a positive role in policy formulation,’ says Myoli. ‘We have a positive contribution to make and it is our collective duty to help create a solution that everyone can trust.’

This article was published in Accountancy SA, March 2021