Tak­ing stock of the au­dit in­dus­try

Greater con­sol­i­da­tion means less choice for clients

Financial Mail - - BOARDROOM TAILS - @an­ncrotty

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

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