Some­thing rot­ten in cor­po­rate SA …

With all eyes on state flaws, pri­vate-sec­tor stan­dards plum­met

Sunday Times - - Business Newsmaker - By CHRIS BAR­RON

● Pri­vate-sec­tor cor­rup­tion could be “quite a bit worse than we think”, says Claudelle von Eck, CEO of the In­sti­tute of In­ter­nal Au­di­tors South Africa (IIA SA).

Ram­pant cor­rup­tion in the pub­lic sec­tor has “lulled us into think­ing that things are go­ing very well in the pri­vate sec­tor”.

Ac­cord­ing to the 2018 Cor­po­rate Gov­er­nance In­dex re­leased by the IIA SA, cor­po­rate gov­er­nance in SA has hit record lows. Mostly this re­flects the calami­tous state of cor­po­rate gov­er­nance in the pub­lic sec­tor, which Von Eck says has di­verted at­ten­tion from prob­lems in the pri­vate sec­tor.

The fo­cus on pub­lic-sec­tor de­ba­cles has let pri­vate-sec­tor com­pa­nies off the hook, she says.

Stein­hoff and the VBS Mu­tual Bank scan­dal have been mas­sive wake-up calls.

“I think the fo­cus in SA has been too much on the pub­lic sec­tor. Part of that is be­cause where the pub­lic sec­tor is con­cerned it’s our money, it’s much more per­sonal, and there­fore we re­act a lot stronger than we would with pri­vate-sec­tor com­pa­nies.”

Given the amount of pen­sion money in­vested in com­pa­nies like Stein­hoff, there should have been more fo­cus on cor­po­rate gov­er­nance in the pri­vate sec­tor.

Part of the prob­lem is that peo­ple of­ten have no idea where their money is in­vested.

“We need to do a lot more to help them un­der­stand how cor­po­rate fail­ures af­fect them. A lot of peo­ple af­fected by Stein­hoff have not com­pre­hended to what de­gree they have been af­fected.”

The in­dex high­lights the need for more share­holder ac­tivism, she says.

“Share­hold­ers have to do some sel­f­re­flec­tion.” They have them­selves to blame as well for dis­as­ters like Stein­hoff. They need to play a stronger role in hold­ing or­gan­i­sa­tions ac­count­able, says Von Eck.

They must an­swer the same ques­tions that are be­ing asked of the Stein­hoff board: “Did you ap­ply your mind to what your re­spon­si­bil­i­ties are?”

Too many in­sti­tu­tional share­hold­ers “are not clearly see­ing the role they are sup­posed to play”. By not ask­ing the right ques­tions, they have en­abled cor­rup­tion and cor­po­rate gov­er­nance fail­ures, she says.

“If they’re not ask­ing the right ques­tions, and hav­ing the right con­ver­sa­tions at a deep enough level, then cor­po­rate fail­ures like this is what you’re go­ing to see.”

The in­dex also raises ques­tions about the role and ef­fec­tive­ness of in­ter­nal au­di­tors.

They re­port to au­dit com­mit­tees and man­age­ment, which ei­ther bully and in­tim­i­date them into sweep­ing in­con­ve­nient find­ings un­der the car­pet — “we see quite a lot of that” — or ig­nore their find­ings and fail to pass them on to the board.

In part, this re­flects a de­cline in the quality of univer­sity grad­u­ates.

“Gen­er­ally speak­ing, we are con­cerned about the com­pe­tence of in­ter­nal au­di­tors.

“Of­ten we find that or­gan­i­sa­tions em­ploy peo­ple in in­ter­nal au­dit po­si­tions with­out en­sur­ing that they have gone through what we con­sider a nec­es­sary test of com­pe­tence so that you can ex­pect at least a cer­tain min­i­mum, and then en­sur­ing that they ad­here to con­tin­ual pro­fes­sional de­vel­op­ment.”

Too many or­gan­i­sa­tions are not en­sur­ing they re­cruit and ap­point peo­ple who are ad­e­quately skilled. This is ei­ther be­cause they don’t un­der­stand the value of an in­ter­nal au­dit, or be­cause it suits their pur­pose.

Less-qual­i­fied, less-ex­pe­ri­enced and more ju­nior au­di­tors are eas­ier to in­tim­i­date and ig­nore.

“We some­times hear that there is a very de­lib­er­ate in­ten­tion to en­sure the in­ter­nal au­di­tor is not at a se­nior-enough level and is not strong enough.”

This is mainly a prob­lem in the pub­lic sec­tor, but also hap­pens in the pri­vate sec­tor.

Or­gan­i­sa­tions fre­quently em­ploy ex­ter­nal au­di­tors to fill the in­ter­nal au­di­tor role, which they’re not trained or qual­i­fied for.

In­ter­nal au­dit is a risk-based dis­ci­pline that reaches across the en­tire or­gan­i­sa­tion. Ex­ter­nal au­di­tors look at fi­nan­cial state­ments, which is a record­ing of his­tory.

“They’re not trained to spot symp­toms of things go­ing wrong some­where else in the or­gan­i­sa­tion, which is where an in­ter­nal au­dit fo­cus should be.”

That is why th­ese symp­toms are be­ing missed, lead­ing to cor­po­rate fail­ures and wealth de­struc­tion.

The fact that cor­po­rate gov­er­nance has de­clined so markedly in the era of the King codes of cor­po­rate gov­er­nance is not an in­dict­ment of th­ese codes, she says.

The fact is boards lack ex­pe­ri­ence and are not ed­u­cated enough about gov­er­nance.

“A lot of directors don’t un­der­stand all as­pects of gov­er­nance.”

Von Eck does not agree that by lim­it­ing board terms for directors the King codes have con­trib­uted to this prob­lem.

“You can have years of ex­pe­ri­ence and still not ap­ply gov­er­nance prin­ci­ples,” she says, quot­ing Stein­hoff as an ex­am­ple. “I don’t think the in­di­vid­u­als on that board can ar­gue that they didn’t have enough ex­pe­ri­ence.”

An “un­due trust of man­age­ment” seems to have been their prob­lem. They didn’t ask the kind of prob­ing ques­tions they should have.

“Pro­fes­sional scep­ti­cism goes out the win­dow be­cause we’ve be­come too close to the CEO or ex­ec­u­tive team.”

Von Eck says Stein­hoff and other re­cently pub­li­cised cor­po­rate fail­ures have been a timely wake-up call.

“As th­ese things come to the sur­face, peo­ple are a lot more con­scious of their own ac­tions. You can hear that hap­pen­ing in your firms and cor­po­rates.

“It has cre­ated a height­ened aware­ness and more self-re­flec­tion, and ques­tions be­ing asked around: are we do­ing the right things, are we mak­ing sure that we are not the next news?

“That should lead to a more con­scious ap­pli­ca­tion of minds around gov­er­nance prin­ci­ples.”

Does learn­ing how to stay out of the news sud­denly make them more eth­i­cal, though?

Only 48% of chief au­dit ex­ec­u­tives polled for the sur­vey said ethics formed an in­te­gral part of their or­gan­i­sa­tions.

“A lot more peo­ple are be­com­ing aware of what is un­eth­i­cal,” Von Eck says.

She sub­scribes to the “few bad apples” school. “The vast ma­jor­ity of busi­ness lead­ers are good,” she says.

This doesn’t seem to be what in­sur­ance com­pa­nies think. They’re rais­ing their pre­mi­ums to cover them­selves against claims re­sult­ing from un­eth­i­cal be­hav­iour from South African ex­ec­u­tives.

That’s an over­re­ac­tion, Von Eck says. They’ve been “spooked” by the head­lines.

Gen­er­ally speak­ing, we are con­cerned about the com­pe­tence of in­ter­nal au­di­tors Claudelle von Eck

CEO of the In­sti­tute of In­ter­nal Au­di­tors South Africa

Pic­ture: Thapelo More­budi

Claudelle von Eck, CEO of the In­sti­tute of In­ter­nal Au­di­tors South Africa, says in some cases in­ter­nal au­dit­ing is de­lib­er­ately weak­ened to al­low malfea­sance.

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