More rules may mean new gaps
Last week, just days after Tongaat Hulett released a summary of the results of PwC’s investigation into allegations of malpractice, Woolworths held a teleconference to explain to the media and analysts the dramatic and unwieldy implications of the latest change in the International Financial Reporting Standards (IFRS). The two events are tangentially related.
The Tongaat report puts the accounting profession, including auditors, firmly back in the dock — a place from which it has rarely been absent in the past few years. One of the report’s key findings is that certain senior executives initiated or participated in “undesirable accounting practices”, which resulted in profits and assets being overstated. No figures were provided, but previous independent analysis indicated an overstatement of about R4bn. This may seem like chump change in the context of the R185bn of “accounting irregularities” identified at Steinhoff but it might be enough to threaten the continued existence of a 170year-old company.
Days later, the Woolworths group’s CFO, Reeza Isaacs, described the heart-stoppingly complex changes required by the implementation of IFRS16, which aims to bring leased assets on to the balance sheet. The figures for Woolies are as hefty as they were for Pick n Pay and Shoprite, which have already gone through the process. The size of its balance sheet increases 58%, while headline earnings per share shrink 9.3%.
The accounting change has been welcomed by some, who say it improves accountability and enables comparison between companies heavily invested in property with those that lease property. But not everyone believes IFRS16 or any of the increasingly complicated standards are worth the time and expense required. Some fear that by making financial statements even more complex, fewer users will be able to interrogate them. One leading investment manager said IFRS is making it almost impossible for anyone not directly involved in drawing up a set of accounts to follow them.
IFRS, which runs to a mindnumbing 2,000 pages, was a well-intentioned attempt to provide a global common language and standards for businesses that are increasingly transnational. The decision to base IFRS on rules rather than principles was designed to reduce the subjectivity that often led to manipulation by unscrupulous executives.
But the additional complexity has prompted users and leading academics to question whether IFRS may now be playing a contributory role in the “malpractices” and “irregularities” hitting the headlines. It might produce the perfect set of accounts for someone who is honest but, as one accountant said, it opens up all sorts of opportunities for the not-so-honest. Across the globe it appears that tougher new laws designed to clamp down on accounting malpractices and irregularities have achieved little more than create an industry of well-paid experts able to sidestep the rules. This is why IFRS’s bid to re-establish some faith in the audit profession, by introducing ever more rules, is unlikely to work.
There was a time, though it now feels it may have existed more in folklore than reality, when an audit firm could have been relied on to oppose a client’s more blatant challenges to accounting principles. Industry sources say this rarely happens any more, either because the client has brought in so many technical advisers to support its aggressive stance or because the client is too powerful. So audit firms create their own existential threat as users of financial statements question the point of paying tens of millions of rand for accounts that may not stand up to scrutiny.
Ironically, in the short term this prospect might not send chills through the profession. While individual audit firms such as Deloitte and KPMG will have earned much opprobrium for the alleged role passive or otherwise they have played in various financial scandals, the shocking reality is that the industry as a whole becomes richer with every new scandal. Recall that forensic and ordinary auditors picked up R2.4bn for cleaning up after a decade or more of rogue accounting at Steinhoff. Tongaat is keeping mum on its forensic auditing costs.
It’s time for some honest simplicity.
IRONICALLY, IN THE SHORT TERM THIS PROSPECT MIGHT NOT SEND CHILLS THROUGH THE PROFESSION