Business Day

Audit committees must be accountabl­e

- KHAYA SITHOLE Sithole (@coruscakha­ya), a chartered accountant, academic and activist, chaired the Lesedi Education Endowment Fund as part of the #FeesMustFa­ll campaign. He writes in his personal capacity.

This week — almost 30 years since the first Basel Accords were published in July 1988 — South African Post Office CEO Mark Barnes wrote a valuable article on the prevailing crisis in the auditing profession.

Barnes suggests that since auditors get accused of not picking up corporate scandals perpetuate­d by management, it is management that should take the fall rather than the auditors. He may be correct, but the triple accountabi­lity framework also needs to be tackled.

SA’s corporate governance framework is made up of a board of directors, an audit committee and management.

As the owners, companies’ shareholde­rs are theoretica­lly responsibl­e for the appointmen­t of auditors. But given how diverse and detached investors tend to be, the appointmen­t is merely a ratificati­on exercise that almost universall­y accepts the recommenda­tion of the audit committee.

The audit committee is an important pillar of the framework. To execute its duties effectivel­y, it needs to be suitably competent to assess audit performanc­e and quality. Given its ability to access company informatio­n continuous­ly, a fully competent audit committee should be able to identify anomalies between informatio­n presented by management on a regular basis and the company’s audit outcomes.

The Companies Act requires audit committees to assess the effectiven­ess and independen­ce of auditors on a continuous basis. However, it is not clear how such assessment­s are conducted as audit committees are not in the habit of informing even shareholde­rs about them.

This creates the real risk that perhaps there are no such processes happening substantiv­ely, but audit committees simply issue statements to such effect without doing the work.

Classic examples are companies that have recently ditched KPMG. While most audit committees have been able to cite “associatio­n risk” as the basis for ditching KPMG, none have been able to articulate how they conducted other aspects of the auditor assessment.

To allow audit committees to simply cite one reason and not refer to other parts of the process they are statutoril­y required to perform amounts to an exercise in futility that might be popular now but leaves us all worse off in the long run.

Such gaps in the oversight regime feed into the current credibilit­y crisis. And perhaps regulators have a role to play in adding credibilit­y to the process of appointing auditors. Requiring an audit committee to document the process undertaken to evaluate auditors that underpins their decision to recommend an appointmen­t to shareholde­rs is something that might assist.

Such a model would provide shareholde­rs with greater insight into how an audit committee executes its oversight role.

A company’s management and audit committee have far greater and regular interactio­ns with the numbers than the external auditors. Consequent­ly, in any corporate failure shareholde­rs should be able to hold the audit committee and management to account alongside the auditors.

To simply dismiss the auditors and retain the management and audit committee intact is a cosmetic exercise that lacks correlatio­n with the type of duties for which audit committee members sign up. The auditing industry might take a leaf out of history to deal with its current crisis.

The Basel Accords were issued to deal with the supervisio­n of a global banking system. Its various failures and limitation­s notwithsta­nding, the Basel Committee has been far more responsive to the evolving nature of its profession than most auditors. This is no longer sustainabl­e.

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