Watchdog to tighten grip on auditing
Irba places focus on companies’ transparency
THE South African audit profession’s watchdog is considering forcing firms to split their audit and advisory arms in an effort to enhance their independence and improve audit quality.
With auditors embroiled in a rising number of scandals globally and at home, the Independent Regulatory Board for Auditors (Irba) was weighing up the benefits of creating “auditonly” firms, Irba chief executive Bernard Agulhas said.
Irba would also soon require audit firms to produce “transparency reports”, which would disclose audited financial statements of these firms, including the revenue split between advisory and audit, Agulhas said at the weekend.
Advisory services had become an increasingly large source of revenue for audit firms, which could lead to audit quality being compromised when higher investments were made in non-audit services, Agulhas said.
“While we recognise arguments that clients might prefer a one-stop shop when securing professional services, this can never outweigh the risk that the audit has become a secondary product when it comes to the sources of firms’ revenue streams,” he said.
The move comes after the British press reported in March that the UK’s Financial Reporting Council was calling for an investigation by competition authorities into the case for auditonly firms.
Regulators have long called for the break-up of audit firms, with the EU introducing auditreform legislation in June 2016 that restricted which non-audit services an auditor could provide to clients.
The big four audit firms have been dogged by a string of corporate accounting scandals, from Steinhoff and VBS Mutual Bank to construction firm Carillion in Britain and Satyam Computer Services in India, which led to PwC being banned from auditing listed companies in that country for two years.
While auditors agree that trust and confidence need to be restored to the profession, they have not warmed to the idea of splitting their businesses in half.
“Audits of complex organisations need a diverse range of expertise in many specialist areas – for example, data analytics, the valuation of physical assets and complex financial instruments, actuarial calculations, treasury operations, tax compliance and many more,” said Fulvio Tonelli, PwC’s chief operating officer.
“Most of these specialist areas originate outside the audit itself. We believe that the existing collaboration model of having this expertise within the firm best enables an auditor to deliver audits of high quality and insight. The skills, experience and insights of these specialists can be brought to the audit at short notice and throughout the audit cycle,” Tonelli said.
Yolandie Ferreira, head of audit at Mazars Cape Town, expressed similar sentiments. Specialist industry skills were often developed in audit before an individual moved over to advisory. “It is very difficult for us to work with a specialist who has no idea how to audit.”
Equally, audit technical partners needed to develop specialisations, too, said Michelle Olckers, managing partner at Mazars Cape Town.
Ferreira argued that audit firms’ independence was in fact enhanced where there was a greater reliance on advisory services for revenue, as it meant that profitability was not the main concern of the auditors.
Ansie Ramalho, independent corporate governance expert and former project lead on King IV, said firms with advisory arms often had more insight in the audit engagement and could serve clients better.
The Companies Act requires audit committees to review the extent to which a company’s auditor provided non-audit services to it and assess whether this may impair the auditors’ independence. —