Audit controls and ethics plummet

SA has regressed to record lows in its corporate governance controls and the gap between what business leaders say and what their company culture promotes keeps widening, according to the 2018 Corporate Governance Index released by the Institute of Internal Auditors SA (IIASA).

The study comes in the wake of corporate scandals that have hit SA in the past year. Unsurprisingly, ethics and audit assurance were two components of corporate governance that registered the biggest declines. The other areas the index measured include compliance, leadership, performance and risk. Only 48% of chief audit executives said ethics form an integral part of their organisations.

“What really worries me is that when we started the index, we were at 66%. We’ve seen a drop of 18% overall from 2013… Right noises are being made at the top, but it’s not filtering through to the culture of the organisation. That gap is growing,” said Dr Claudelle von Eck, CEO of IIASA.

The institute received the highest number of responses from chief audit executives in 2018, and responses they gave about corporate governance practices in their organisations dragged the index to 2.8, its lowest since its inception in 2013. The highest scale is 4.

Von Eck said while the index was constructed using a survey, auditors’ responses were not based on sentiment but rather on what actually took place in their organisations.

While corporate scandals of the past year have put the spotlight on external auditors in particular, Von Eck said internal auditors are under intense pressure to monitor controls around company executives.

“By the time we get to the financials, it’s too late. Is internal auditing looking at whether controls around the CEO are adequate and adhered to? They should be picking up those red flags before it’s even reported in the financial,” she said.

Prof Mervyn King, chair of the King Committee on Corporate Governance in SA, said if anybody ever questioned the importance of internal auditors, that has changed completely.

The head of the internal audit team, he argued, has become the most important person in corporate governance, as S&P 500 data shows that external assurers — given that their focus is only on financials — were now auditing only 16% of the companies’ value.

On the other hand, as the scope of work that has to be performed by internal auditors swells, only 35% of audit executives were adamant they have adequate resources to enable them to do their jobs properly.