‘Accountants need tougher regulation’

Imre Nagy, CEO of the Independent Regulatory Board for Auditors (Irba), says while it's their job to hold errant auditors accountable, they can't realistically check every audit. 

“We can't look over every auditor's shoulder when they sign off on an audit. That's not the regulator's role, that's the audit firms' responsibility.”

But he admits that better oversight by regulators would “probably” have prevented the VBS disaster, though primary responsibility still lies with the directors of the bank.

“The VBS case highlights significant shortcomings in the regulatory framework governing the corporate conduct and reporting ecosystem in South Africa. Not all lines of defence did what they were supposed to do, starting with management and those charged with governance.”

Two partners at audit firm KPMG when it was involved in the VBS audit became complicit in the corruption that destroyed the mutual bank, when they arranged "loans" from VBS amounting to R9.6m, which they neither disclosed nor repaid. Dumisani Tshuma was deregistered by Irba and given the maximum fine then permissible, which was R200,000. 

Disciplinary proceedings are ongoing against Sipho Malaba, KPMG's engagement partner on its VBS audit team, whom Tshuma implicated.

Given that their complicity facilitated the looting of more than R2bn from pensioners, widows and orphans, leaving many of them destitute, should they be jailed rather than simply fined and deregistered?

Irba's mandate is limited to the application of administrative law and not criminal law, says Nagy, so he can't speculate about criminal charges.

“I do however support appropriate consequence management and sanctions that are concomitant to the seriousness of the crime.”

Whether the prospect of stricter fines gazetted belatedly, but not retrospectively, by the finance minister last month, of up to R15m for auditors guilty of improper conduct and R25m for their firms, would have been enough to prevent the VBS scandal is debatable, he says.

“Because of higher fines auditors are likely to be more cautious. Whether it would have prevented VBS [collapse] is speculative. I would not go so far.”

He points out that audit failures still happen in places such as the UK and US, which have “very high” fines.

The first person to be fingered for the VBS heist was CFO Phillip Truter. He did get jail time, but served only three and a half years out of an original seven and a half year sentence, after cutting a plea deal with the NPA.

While auditors are subject to rigorous inspections and disciplinary actions by Irba, accountants do not face the same level of scrutiny

—  Imre Nagy, CEO of the Independent Regulatory Board for Auditors

Nagy refuses to comment about the deterrent value this is likely to have for the accounting profession, which lies at the heart of almost every corporate scandal in South Africa.

One of the reasons for this, he believes, is that despite recommendations from the World Bank 10 years ago that South Africa elevate the regulation of accountants to the same level as auditors, they remain self-regulated, unlike auditors who are subject to “stringent oversight” by Irba.

He points to another KPMG auditor, Jacques Wessels, who was deregistered by Irba in 2019 after being found  responsible for auditing the financial statements of Gupta-owned Linkway Trading, which was used to divert taxpayers’ money from the Estina dairy project to pay for a Gupta family wedding. He was subsequently disbarred as an accountant after Irba referred its findings and sanction to the South African Institute of Chartered Accountants (Saica).

Nagy says the disparity in regulatory oversight between accountants and auditors is a major weakness in the financial reporting ecosystem, which they're trying to get the National Treasury to address.

“While auditors are subject to rigorous inspections and disciplinary actions by Irba, accountants do not face the same level of scrutiny.”

This can lead to a lack of accountability and increased risk of financial misstatements. Without robust regulatory frameworks for the whole financial and corporate reporting system, there are few deterrents for unethical behaviour among accountants, he says.

“The VBS bank failure illustrated how accountants and company directors, under self-regulation, could be complicit in fraudulent activities without facing significant repercussions.”

The lack of cohesive regulation undermines the trust of stakeholders, including investors and the public, who rely on accurate financial reporting to make informed decisions.

“Fragmented regulation compromises the reliability of financial information, leading to broader economic repercussions as has been illustrated by the many depositors of VBS bank who lost all their savings.”

The VBS heist underlines the need for South Africa to raise the regulation of accountants to the same level as auditors as recommended by the World Bank, he says.

Regulation should also extend to company directors. Although they can be declared delinquent under the Companies Act, this seldom happens because of the high legal costs involved.

“Implementing these recommendations could mitigate risks and prevent future collapses similar to VBS.”

He won't comment on the stated intention of the Gauteng provincial government to start its own bank. “This is beyond my mandate of audit regulation. However, the expectation is for any new bank to operate within the rules of the prudential authority of the Reserve Bank.”

He also refuses to speculate on the likelihood of a VBS replay in the event of Gauteng starting a bank.

“I can't speculate. The VBS bank collapse is probably the strongest case study we have that highlights the fragmented regulation of accounting professionals and directors within companies that resulted in billions lost. One hopes that lessons learnt from VBS and African Bank would be considered by all involved to avoid a replay.”

According to the global anti-corruption body Transparency International, South Africa reached its worst ever financial corruption score last year, taking it into the category of flawed democracies.

Nagy noted that in all the countries at the top of the index there is strong rule of law.

“We need to see more accountability in the entire ecosystem from all law enforcement agencies and role players if we want to stamp out corruption. If there's accountability and consequence management across the ecosystem, there will be less risk of another VBS.”