Twenty years ago the auditing profession faced its first big existential crisis with the demise of Arthur Andersen. Since then the profession has had various skirmishes with scandal and conflict that have reopened the debate on how best to structure a profession whose fundamental operational currency is public trust.
The year 2019 was a particularly dark one for auditors. The failures of Thomas Cook, Carillion and BHS once again caused the public to ask where the auditors were when it all went wrong. In the aftermath of the failure of Patisserie Valerie, the head of Grant Thornton — which had been the auditors of the failed bakery chain — stated that auditors are not looking for fraud when conducting audits. The natural response from aggrieved politicians was to ask: “So what exactly is the point of the audit?”
The point, of course, is that the very design of the audit process is fraught with the type of limitations that result in the gap between what people think auditors do and what they actually commit themselves to doing. As a retrospective review exercise that commits to offering nothing more than reasonable assurance regarding the reliability of accounts, an audit’s capacity to detect material fraud is a combination of the level of sophistication of the fraud being perpetrated and an auditor’s capacity to apply common sense.
Auditors have framed their common-sense duty around the concept of professional scepticism, which is a theory premised on the idea that they do not unilaterally accept management representations without interrogating them. It is within the prism of scepticism in which the scent of fraud is expected to be detected. This scepticism is harnessed over time through practice.
Regulatory intervention
But sophisticated fraudulent practices are likely to elude the most competent of auditors anywhere you look. The pressure to maximise revenues by allocating junior staff to audits remains a point of contention within the industry. While all auditors who have audited failed entities have a universal defence that they were not looking for fraud, it is no longer tenable for that defence to be the end point of the conversation. In particular when the fraud lacks sophistication, as with Tongaat, the question Deloitte ought to be addressing is how the scent of such an elementary fraud could have eluded them. The answer to that question will indicate whether the balance between the complexity of the fraud and the common-sense duty is appropriate.
The inability of the profession to sort out its structural limitations is an open invitation for regulatory intervention, and the most comprehensive regulatory reforms that have been proposed thus far have emanated from the UK. The Brydon report proposes that the duty of the auditor ought to be to “inform as well as to confirm and verify”; the audit scope should be expanded to incorporate fraud; and a greater focus should be placed on going concern rather than just fairness of accounts. If the Brydon recommendations are to be adopted, the amended rules would explicitly impose upon the auditor an obligation to detect material fraud in all reasonable ways.
Such amendments would have knock-on effects on the SA markets. The consequence would be an accelerated scope for professional liability, which would perversely discourage prospective auditors from joining the profession. But therein lies the opportunity to interrogate who exactly should be licensed to audit. If the matter under audit is of such complexity that it warrants the reliance on specialised non-accounting professionals, it is worth considering whether such consultants should also be robustly regulated, as their services are a fundamental part of the audit process.
To only regulate and impose an obligation on accountants, whose reliance on the work of experts is crucial to the entire process, seems to be a missed opportunity to comprehensively oversee all those whose work is fundamental to the public trust.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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