Allowing the Independent Regulator Body for Auditors (Irba) to fine errant auditors and audit firms up to R25m is a “powerful weapon” in its armoury, says the board's CEO Imre Nagy. However, it won't stop corporate scandals unless other roleplayers and law-enforcement agencies come to the party, he adds.
“We need to see more accountability in the entire ecosystem from all law-enforcement agencies and roleplayers if we want to stamp out corruption and failures in the system,” he says.
Finance minister Enoch Godongwana last week gazetted changes to the auditing profession act so Irba can fine auditors R5m if they admit guilt and R10m if they don't but are found guilty by its disciplinary committee, and audit firms up to R25m.
“We will hold auditors accountable as best as we can, but there are other roleplayers in the ecosystem that also need to be held accountable,” says Nagy. “Auditors are but a small piece of the financial reporting chain that is supposed to make sure credibility and integrity prevail in the financial system.”
The behaviour of auditors and audit firms is heavily influenced by how robust these other players are.
“If there's accountability and consequence management across the ecosystem there's less risk that will come through to the auditors, and hopefully we'll then see fewer audit failures. That is something that needs to be seriously looked at.”
Not that he's making excuses for their failures, he says.
“Auditors need to do what they must do. There are international standards they must comply with, an ethics code, and we expect them to be the whistleblowers if they see something that is not done correctly.”
Though auditors can only work with what the companies they audit provide them, “and can have the wool pulled over their eyes, our view is that auditors can and should do more in terms of existing standards to detect fraud”, he says.
Knowing they could be fined millions if they don't “will definitely give auditors pause for thought in terms of their conduct”.
It will also correct the “mismatch between conduct and consequence”, with the highest fine until now, even for firms, a “pathetic” R200,000. The lack of consequences shredded the industry's public credibility thanks to “a series of epic failures and blunders”.
Not the least of these was their failure to blow the whistle on Steinhoff and Tongaat, but “unfortunately” the new mega fines won't apply to the auditors implicated in those scandals because they predate the law's amendment in April 2021.
“But those events certainly triggered our journey to get to where we are now.”
The new fines, which Irba has been agitating for since 2016, belatedly bring it in line with most audit regulators around the world, he says.
“It's globally accepted as good practice that significant fines are a necessary tool for regulators to promote accountability and have some level of deterrence. This is especially important for the auditing profession where the stakes are extremely high for investors who rely on audit opinions when making investment decisions.”
However, Irba has always had serious sanctions at its disposal apart from fines, such as suspension and debarring, and has been criticised for not using them often enough.
Nagy denies the board has been too soft, pointing out that it debarred an auditor recently.
This was Mitesh Patel, the former CEO of audit firm Nkonki, who was debarred in March after Irba found he'd fronted for the Guptas in organising a “management buyout” of Nkonki in 2016.
But he was one of only two, the other being Jacques Wessels, the KPMG auditor who audited the Gupta-owned Linkway Trading and was debarred in 2018.
Nevertheless, Nagy implies, and is supported by nonprofit organisation Open Secrets, which focuses on private-sector corruption, that Irba's been doing a lot more than law-enforcement agencies such as the Hawks and National Prosecuting Authority.
All I can say is the ball is squarely in the hands of audit committees and shareholders now around firm tenure. Audit committees have a role to monitor auditing independence when they reappoint auditors.
When Deloitte auditor Gavin Kruger was arrested and criminally charged last year for his role in the Tongaat Hulett scandal, it came as a bolt from the blue that sent “shock waves” through the accounting profession, says Nagy.
It was the first time an auditor in South Africa had ever been criminally charged under the Auditing Profession Act.
The obvious question is why Irba didn't investigate Kruger and debar him?
He says the regulator had reached the closing stages of an investigation, but this was put on hold when it became aware of the criminal charges against Kruger in the media.
The absence of collaboration and information sharing between law-enforcement agencies and Irba is something he's been trying hard to correct. “There's definitely room for us to work closer with law enforcement and for them to work closer with us.”
Meanwhile, the mandatory audit firm rotation rule, which Irba believes is crucial in fighting corporate corruption by promoting auditor independence, has been set aside by the Supreme Court of Appeal after a challenge by chartered accountants in Gauteng.
How disturbing is it that CAs who sit on company audit committees don't seem to share Irba's belief that using the same audit firms for up to 100 years or more might impair auditor independence, which Nagy calls “a foundational principle of auditing”?
“The ball is squarely in the hands of audit committees and shareholders now around firm tenure. Audit committees have a role to monitor auditing independence when they reappoint auditors.”
Are they among the roleplayers who need to lift their game?
“We're engaging with them to help them take more informed decisions. If they have access to the right information they could definitely take better decisions.”
He says a gap in the campaign to improve audit standards and prevent another Tongaat or Steinhoff is that Irba doesn't regulate these critical roleplayers. “It's a big gap because the people who are CEOs, CFOs and managers of companies are mostly CAs and we don't regulate CAs, we don't have that mandate.”
A CA himself, he has recommended to the National Treasury that it expand Irba's regulatory framework to include CAs. “We're probably best positioned to take on that role.”
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