Taking stock of the audit industry
Greater consolidation means less choice for clients
SA’s auditing industry will, with any luck, be turned completely on its head by the time PWC completes what is certain to be a marathon investigation of the Steinhoff accounts. Sadly, on the basis of previous experience, it’s unlikely there’s that much luck around.
As KPMG’S clients battle with the big “stay or go” question, Deloitte’s customers must be hoping desperately that Pwc’s work doesn’t turn up anything too sinister. It’s unlikely the local industry could cope with an exodus from two major firms at the same time. In just the past week or so we had Telkom explaining how it was recommending the appointment of PWC and Sizwentsalubagobodo as the group’s new external auditors. The recommendation followed an “extensive and robust” process.
There’s no doubt it was robust, but it’s hard to imagine it was extensive. Given that Telkom was retiring EY after 20 years and that recommending KPMG would have been problematic given the auditor-general’s ruling around that company, an “extensive” search process seems unlikely.
A few days later, it was evident that a number of Anglo American shareholders are concerned about the reappointment of Deloitte, which has been the group’s auditor for 18 years.
It’s not just SA businesses facing an auditor problem — it is the entire global business community. It is remarkable, given all that has happened in the past few decades, that the problem has actually got steadily worse. That this has happened is largely a reflection of the enormous power this selfregulated industry has gathered around itself. Nothing has been able to shake its hold on the business community it is supposed to oversee.
Consider what happened in the wake of the Enron scandal in 2002. The “big five” audit firms became the bigger four as Arthur Andersen was found guilty of criminal charges relating to its Enron work and surrendered its licence to practice. Given that most of the Andersen partners found homes in one of the other firms, there was little real consequence for them.
With Andersen gone, the business community was faced with a 20% reduction in the number of service providers it could choose from. Perhaps more significant was that the scandal prompted the introduction of a slew of new regulations. These had to be audited by someone, and that someone happened to be the colleagues of the major perpetrator.
There’s not much chance of encouraging an industry to change its behaviour when every time it walks its clients into a disaster it faces little in the way of serious consequences — and has the prospect of generating even more business opportunities from the resulting tighter regulations.
It is difficult to think of a business that has enjoyed the sort of independent, unaccountable power the audit profession has. It is largely self-regulated, the finances of individual firms are shrouded in secrecy, and it has an unmatched crony network, as partners slip effortlessly into decision-making positions in the business community.
It will take more than a lot of luck to change this industry.
It is difficult to think of a business that has enjoyed the sort of unaccountable power that the audit profession has