White-collar criminals still get off scot-free
| South Africa’s auditors are doing an excellent job of uncovering wrongdoing, but police could not care less
AUDITORS are doing “an excellent job” of reporting whitecollar crime, but the authorities “don’t do anything about it”, says the CEO of the Independent Regulatory Board for Auditors, Bernard Agulhas.
This explains why, although according to the World Economic Forum South Africa has had the highest global auditing and reporting standards in the world over the past five years, white-collar crime in this country is rocketing.
In its annual report released last week, the board revealed that the number of “reportable irregularities” it received had doubled in the last financial year, up from 611 to 1 123.
This is partly because its inspection processes have become “more robust”, and partly because the penalties for company directors and executives involved in crime are too light.
“Legislation such as the Companies Act should ensure there are heavier penalties for the directors involved in the crime,” he says.
But the biggest reason for the dramatic increase in white-collar crime is that the perpetrators are getting away with it.
Former finance minister Trevor Manuel established the reportable irregularities mechanism in 2006 to cut down on corporate crime.
“We thought that if businesses know that auditors can pick up these irregularities and report them then there should be less,” says Agulhas. “But if there is no action from the other authorities, then why should they stop with the crime?
“Auditors can continue to report it, but somebody has to do something about it.”
The board can act against auditors if they don’t report irregularities, but there is nothing it can do if the relevant authorities don’t act on these reports.
Depending on the nature of the irregularity, these authorities include the South African Revenue Service, the Reserve Bank, the Financial Services Board and the JSE. When these institutions receive reports of violations from the board, they at least let the regulator know that they are investigating.
But mostly the authority to which the board refers reported irregularities is the police. And, for the most part, the South African Police Service doesn’t respond at all.
Agulhas is careful not to attribute the failure to investigate and prosecute white-collar crime to the abolition of the Scorpions. But he says there is a need for a separate police unit to deal with the irregularities, “so that the police give it priority and respond to it”.
“At the moment the reports that we send to the police become part of a normal charge or complaint or matter that is reported to the police like any other matter.”
The Scorpions, of course, used to be that special unit when its investigators worked closely with the National Prosecuting Authority.
“First prize for us would be if the specialised commercial crimes unit in the NPA could be strengthened,” says Agulhas. That is putting it mildly, considering that to all intents and purposes this unit has ceased to exist.
Almost certainly, white-collar crime is escalating even quicker than the number of reported irregularities received by the regulatory board indicates. Because of South Africa’s economic crisis, the number of companies trying to increase their profits by illegitimate means is increasing, as are their efforts to stop auditors from reporting on them.
“We are finding situations where auditors are being threatened if they report irregularities,” says Agulhas. “We haven’t had any incidents [of violence] yet, but it could start to happen in the current environment.”
Agulhas, who at 52 is in his third term as CEO, says the failure of the authorities to follow up on reports of irregularities is damaging the morale of the auditing profession.
“Our mandate is to protect the public by ensuring that auditors deliver high-quality audits. I am passionate about protection of the public. That is what makes me get up every morning.”
But as long as the police don’t do their job, the public are not being protected regardless of how hard the auditors work.
“On the roadshows we do, auditors are raising that issue. They say we come round and talk to them about high audit quality, but what is the use if other things are not working?”
The board has asked the minister of finance to raise these issues with the appropriate ministers to get the authorities under their jurisdiction to up their game.
“If our minister raises it with his counterparts, I think we can influence it,” he says.
So far, he concedes, there is no sign of this happening. So, has the minister in fact raised the matter with his colleague?
“I think the minister has a lot on his plate,” says Agulhas.
Audit firm Deloitte said recently that the rise in fraud, corruption and money laundering was having a “devastating effect on South Africa’s ability to grow its economy”. Whitecollar crime is said to be costing the country more than R40-billion a year.
Doesn’t he think this should be one of the more important things on the minister’s plate?
“If we continue to raise it with the minister, the minister can raise it with the other departments. The fact that he hasn’t done it yet — he is still fairly new and maybe he has done it, I don’t know.
“But I think he could address it at that level. Something needs to be done to get the authorities to respond to these reports.”
As white-collar crime increases, so the number of registered auditors declines. The board’s annual report reflects a drop over five years from 4 398 to 4 281.
The CEO of Grant Thornton Johannesburg, Andrew Hannington, writing in the Financial Mail, sees this as a crisis in the making, but Agulhas is unfazed.
Given the increasingly demanding regulatory environment in which auditors perform audits, he is surprised that the numbers have gone down by so little, he says.
“The profession is thought to have its challenges, but interestingly enough the numbers are not going down by much. They’ve remained pretty stable.
“It’s not as if any organisation is looking for auditors, so the market must be responding to the need for auditors.”
A more serious problem, he says, is the failure of audit firms to transform, which is reflected in the fact that only 10% of registered auditors are Africans.
“The audit firms say they invest a lot in transformation, but we’re not seeing the results. When we speak to articled clerks at the firm they still seem to be facing issues that they faced 10 years ago, which we thought they were no longer facing.”
Ten years ago, black auditors complained that firms allocated “the nice jobs” to white clerks. Agulhas says research shows this is “still the situation”.
He says an amendment to the auditing profession law that was passed this year “will assist in transformation. It will make it easier for us to manage transformation.”
Although candidate auditors will no longer have to pass the public practice exam to become registered auditors, he denies that the law change will make it easier to become an auditor.
“Definitely not,” he says. There will be more emphasis on practical training than theory, but auditors will still have to write the South African Institute of Chartered Accountants board exam.
But the CA exam is a “generalist exam”, and the modern environment requires more specialist training for auditors, he says.
“To become an auditor we’re actually imposing additional competency requirements on auditors because we see the auditor as a specialist CA.”
The new law will assist transformation by changing the relationship between the regulatory board and firms where auditors do their traineeships.
“We will work very closely with them to ensure we address any issues they might face at the firm that might cause black people to leave the profession.”
Shouldn’t the board be independent of the profession it regulates?
“We can’t get too involved with the firms,” he says. “If we start saying to the firms that they must promote black clerks before they are competent and something goes wrong on an audit, the [board] should not be seen as the organisation that promoted that.
“And we would never do that.”
We are finding auditors being threatened if they report irregularities